Today the US Supreme Court held that states may require online retailers to collect sales taxes, overruling its 1992 opinion in Quill Corporation v. North Dakota and its 1967 opinion in National Bellas Hess, Inc. v. Illinois. In South Dakota v. Wayfair, Inc., the US Supreme Court took the unusual step of explicitly holding that rationale in a prior opinion is “unsound and incorrect,” particularly the requirement in Quill and National Bellas Hess that a retailer have a physical presence in the state for the state to require the collection of sales taxes.
The majority opinion, written by Justice Kennedy, described the physical presence requirement as an outdated, arbitrary, and formalistic distinction that is entirely artificial, ignoring substantial virtual connections to the state. Justice Kennedy wrote that the rule incentivizes avoidance of having a physical presence, creating distortions resulting in a lack of storefronts, distribution points, and employment centers that may otherwise be more “efficient or desirable.” In his dissent, Chief Justice Roberts argued that while the Quill and National Bellas Hess decisions were “wrongly decided,” the answer was not to overrule precedent. He suggested that Congress be left to address the issue, citing the potential disruption to e-commerce.
The immediate impact of this decision will be more lawsuits to define the finer points of this rule. The near-term impact will be state legislation addressing online sales, as states start to seek the additional revenue stream. The South Dakota law that the Court examined applied only to online retailers with more than $100,000 in annual sales or 200 transactions in the state. It is unclear if there is a difference in the way smaller retailers will be treated, as that issue was not before the Court. Brick and mortar retailers have long complained that the physical presence rule gives online retailers the advantage of the ability to lower prices, enhancing interstate commerce at the expense of intrastate business.
As of 2 PM today, Amazon’s stock was down .78% and Wayfair’s stock was down .77%, while smaller online retailers were hit the hardest with eBay’s stock down 2.66%, and Etsy’s stock down 2.17%. The big winner today was Avalara, a cloud-based tax compliance platform; after its initial public offering last week, its shares are up 11.20% today.
Justice Kennedy was joined in the majority by Justices Thomas, Ginsburg, Alito, and Gorsuch. Justices Thomas and Gorsuch filed concurring opinions. Chief Justice Roberts was joined in the dissent by Justices Breyer, Sotomayor, and Kagan.