Supreme Court Rules States Can Collect Sales Tax from Online Sellers

Ecommerce Companies Don’t Pay Out-of-state Sales Tax. But Will They Soon?

The Supreme Court ruled on Thursday that online retailers can be required to collect sales tax in states where they don’t maintain a physical presence – a decision that settles a years-long dispute regarding state tax authority in the digital age.

In a 5-4 ruling, the high court overturned its 1992 decision in Quill v. North Dakota, which decided that out-of-state companies – at the time, mostly catalog companies – did not have to collect sales tax if they lacked a physical presence in the state.

Physical brick-and-mortar retailers have long decried the Quill decision, citing a difficulty to compete against their online counterparts because of the extra charge to their customers.

U.S. states have also voiced their criticism of Quill, arguing that they’re sacrificing millions of dollars in tax revenue for state- and locally-funded initiatives. Most notable of those states is South Dakota, which passed a state law in 2016 requiring digital businesses to collect sales tax if they bring in sales of more than $100,000 or more than 200 transactions per year.

When several large online retailers failed to register under the new law, including home goods company Wayfair, South Dakota brought legal action against those companies in the South Dakota v. Wayfair case in April of this year. But Quill stood in South Dakota’s way.

As of today, the Court has ruled in favor of South Dakota, explicitly overruling Quill as “unsound and incorrect.”

The Court’s opinion went on to state that Quill “creates rather than resolves market distortions. In effect, it is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers,” which is “something that has become easier and more prevalent as technology has advanced.”

Justices Anthony Kennedy authored the Court’s opinion, which was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. Chief Justice John Roberts filed a dissenting opinion joined by Justices Stephen Breyer, Sonja Sotomayor, and Elena Kagan.

Read more on this story in a previous cleverbridge blog.

Kyle Shamorian is the content marketer for cleverbridge.