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A Changed World: The Supreme Court Permits State and Local Taxation of Online Sales by Retailers with No State Presence
With the growing and evolving retail world, which we have discussed before, one thing had remained constant: retailers did not have to collect sales tax for online sales to states in which they had no physical presence. Thanks to the Supreme Court, that principle had remained a stalwart for both online retailers and brick-and-mortar retailers who wish to expand their markets beyond their physical stores. However, the Supreme Court has overturned that precedent and is now allowing states and localities to subject all sales, including online sales, to consumers within a state to sales taxes. The Court’s decision has the potential to significantly impact the way retailers interact and sell to online customers and could have ripple effects for brick-and-mortar and online sellers throughout the country.
The Supreme Court case, South Dakota v. Wayfair, Inc., was argued in April, 2018 and the Court issued its decision, siding with South Dakota, on June 21, 2018. At issue in this case is a South Dakota statute that requires any retailer who sells more than $100,000 worth of goods or conducts more than 200 transactions within the state to collect the state sales tax for those goods. South Dakota sued four online retailers to force them to comply with the state law. The retailers won in state courts due to a 1992 Supreme Court precedent, Quill Corp. v. North Dakota, in which the Supreme Court declared that states and localities could not subject catalog retailers to state and local sales taxes if the retailer does not have a physical presence within the state. Now the Supreme Court has ruled, 5-4, for South Dakota, overturning Quill.
In Quill, the Supreme Court established that, absent a physical presence, states and localities could not subject retailers to sales taxes. Quill dealt with catalog sales right on the cusp of the online retail boom. Since 1992, sales from out-of-state retailers have skyrocketed, largely due to online sales. However, absent a physical in-state presence, those sales have not been subject to state or local sales taxes. At least some members of the Supreme Court have questioned the wisdom of Quill in recent years, like Justice Kennedy, who wrote that the court should revisit the Quill decision in a 2015 concurring opinion. The Court’s decision here, as foreshadowed by the oral arguments in April, divided the justices over significant questions on the merits of overturning Quill and the impact on retailers trying to comply with over 12,000 different sales tax laws.
Justice Kennedy, writing for the majority, which included Justices Thomas, Ginsburg, Alito, and Gorsuch, upheld the South Dakota statute. The opinion noted that the physical presence requirement was wrong, especially today given the extensive contacts online retailers have with consumers without ever having physical interaction. The Court further found that the physical presence requirement created an inequality among retailers depending on their business model. The majority recognized that overturning prior precedent is a high burden, but that here, it was clear the Court had erred in its previous decision.
Chief Justice Roberts wrote a dissent, joined by Justices Breyer, Sotomayor, and Kagan. Interestingly, the dissent did not disagree with the general conclusion of the majority – that Quill was wrongly decided. However, the dissent reasoned that because the principle of stare decisis is so strong, it was not correct for the Court to overturn its prior decision given the high burden to do so. Instead, the dissent would have relied on Congress to institute a law allowing state sales taxes of online sales.
The Court’s decision will have a profound impact on retailers, who will now be required to track all online sales in states that impose such sales taxes. Some large retailers, like Amazon, have opted to already take this approach. We expect, as the Court discussed at oral arguments, an increase in the software and tools available to retailers to track these kinds of sales in order to comply with state and local tax laws. We will continue to monitor the ripple effects of the Court’s decision and the resources available to ensure compliance.
Meghan Hottel-Cox is a real estate attorney. She focuses her practice on land use, working with real estate developers and educational institutions on a range of zoning matters. Meghan counsels clients through the full range of project analysis and strategy, helping them to reach their goals when acquiring zoning approvals for projects throughout the District.
Meghan presents before the DC Board of Zoning Adjustment and the DC Zoning Commission on behalf of her clients.
Meghan also handles real estate transactions such as sales, acquisitions, leasing and financing of commercial real estate properties. She assists clients with both single-asset and portfolio transactions over multiple jurisdictions.