Supreme Court Decision on Online Sales Tax Case

June 27, 2018

On June 21, the U.S. Supreme Court handed down its anticipated decision in South Dakota v. Wayfair. The case challenges South Dakota’s application of its sales tax to internet retailers who sell into South Dakota but have no property or employees in the state. At issue is the case Quill Corp. v. North Dakota from 1992, which set the property or employee’s standard for sales taxes using the Court’s (debated) dormant commerce clause power to restrict state taxation of interstate commerce.

In its 5-4 ruling, the Court laid out why South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws would be. This groundbreaking decision now opens the door for states to require out-of-state online retailers and other remote sellers to collect sales tax from their customers, overturning a prior court decision that states have fought for years and that the court upheld in 1992’s Quill case.

Almost immediately after the opinion was handed down, questions started swirling about what might come next as states start to take advantage of the decision. Both Congress and state legislatures will face decisions in coming months over how—and, in some cases, if—to respond now that the longstanding wait on the South Dakota v. Wayfair case has ended. The ruling will create uncertainty among states’ tax laws, which may force Congress to finally act on the issue.

With most state legislatures out of session until 2019, Congress giving clarity on how states can use their new taxing powers could go a long way — if lawmakers could agree on how to approach the issue, which is hard enough in a non-election year.

Some on Capitol Hill forecast a need for legislation to help retailers navigate complexities they are sure to face as they begin to deal with tax laws in states and localities from coast to coast. “We’re still digesting the court decision, but it looks like even though it was favorable that maybe Congress may need now to act,” said Sen. John Thune (R-S.D.), who voted for legislation in 2013 to give states more power to tax out-of-state businesses that sell to their residents. “I think it’s probably coming. It’s just a question of when.”

The Senate bill, from five years ago, the Marketplace Fairness Act, S. 976, garnered 69 votes, but no action was ever taken in the House. Getting legislation through Congress is never easy. “I’ll do everything I can as the top Democrat on the Finance Committee to protect Oregonians—and small business everywhere—from being harmed by this catastrophic decision,” said Sen. Ron Wyden, whose state is one of five that doesn’t have a sales tax.

The new Court decision means that millions of small business may now need to collect and remit sales taxes in the 45 states that have them. That could be an expensive and time-consuming task, especially if the new rules differ between states. Congress will need to determine a minimum sales tax threshold to exempt small businesses from collecting sales taxes for states and local tax jurisdictions nationwide, otherwise these small and family-owned businesses are going to be faced with a maze of complex regulations and compliance guidelines that will devastate their businesses.

The case is South Dakota v. Wayfair, No. 17-494.