It’s not often that you’ll see Ruth Bader Ginsburg and Clarence Thomas on the same side of a 5-4 decision, but that’s exactly what happened today in South Dakota v. Wayfair.
Back in 1992, the court ruled that states could only force a retailer to collect sales tax if they have a “nexus”, or physical presence, in the state.
Of course in the 26 years since that decision the internet changed the way business is done.
South Dakota passed a law that required businesses that had more than 200 orders or $100,000 in sales to South Dakota residents to collect and remit sales tax. They sued Wayfair, Overstock, and Newegg for failing to do so.
The lower courts all ruled against South Dakota as the 1992 case precedent required a nexus in the state.
Today’s ruling tosses that out the window. A nexus no longer requires a physical presence in the state. The court ruled that the fact that the companies are large and do a substantial amount of business in the state is enough to create a nexus.
The court specially cited that it liked the fact that the South Dakota law exempts companies without significant sales in the state from collecting sales tax and that it doesn’t try to collect sales taxes retroactively. It also appreciated that it has a single state level sales tax administration that provides free sales tax software to companies and exempts them from audit liability if they use the software.
Justice Thomas concurred with the majority opinion and expressed regret for not voting differently back in the 1992 case.
The minority opinion wanted to uphold precedent and to wait for Congress to act, not for the Supreme Court to act for them.
At any rate, I’d expect more states to try to quickly emulate South Dakota’s law. That will mean most large online retailers will have to collect sales tax for deliveries to all states with such a law. We’ll have to wait and see what this change will do for 3rd party sellers on Amazon.com, as Amazon currently doesn’t make them collect sales tax in most states.
Should Congress fail to pass a national law, I think that it’s very likely that some states will overreach by taxing companies with a smaller number of sales or by having overly complicated sales tax burdens and that this will wind up back in the Supreme Court yet again.