Supreme Court Overturns Physical Presence Rule and Requires Out-of-State Retailers to Collect and Remit Sales Tax

In a 5-4 decision, the Supreme Court in South Dakota v. Wayfair, Inc. overturned a longstanding precedent requiring businesses to maintain a physical presence in the state before being required to collect and remit sales tax. Under the physical presence requirement, only out-of-state retailers with an actual physical presence in the state were required to collect sales tax. This precedent allowed for retailers that solely participated in shipping goods into the state, upon the request of a consumer via a catalog or online, to bypass the sales tax requirement.  The physical presence doctrine has been the subject of heavy criticism since its inception in 1992, and due to the recent technological advancements in the past twenty years, these complaints have become even more glaring. Due to the rise of the online retail market, it is estimated that the physical presence doctrine has cost states an estimated $8 – $33 billion every year.

In an attempt to mitigate the effects of the physical presence requirement and secure critical funding for essential public services, South Dakota enacted a law requiring out-of-state retailers who deliver more than $100,000 of goods or services in the state or engage in 200 or more separate transactions for delivery to the state to collect and remit sales tax.  The South Dakota Legislature found that due to the State’s inability to collect sales tax and the dramatic revenue loss associated with such regulation, the State has been unable to support its basic services effectively and has declared an emergency.

Justice Kennedy was unsympathetic to the corporate respondents and their request to remain exempt. Kennedy referred to the precedent as “artificial, not just at its edges, but in its entirety.” Furthermore, Kennedy was adamant that the physical presence requirement was inherently flawed and as technology became more and more advanced, the physical presence requirement became “further removed from economic reality.” Kennedy stated that Wayfair, Inc. was requesting the Court to “retain a rule that allows their customers to escape payment of sales taxes. . .” Kennedy further labeled Wayfair’s marketing slogan “one of the best things about buying through Wayfair is that we do not have to charge sales tax” as simply a “subtle offer to assist in tax evasion.” Additionally, while Wayfair specializes in helping their customers build their “dream home” Kennedy reminded them that it is the very state taxes that Wayfair objects to paying that “fund the police and fire departments that protect the home containing their customers’ furniture.”

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