Come See About Fees: The Supremes Demolish Tax Barrier

In 5-4 split, the Court allows states to levy taxes on online retailers

Commerce Reverse

All right, this is big..

On June 21, 2018, the Supreme Court handed down a decision that eliminated a foundational concept in e-commerce.

In a 5-4 split, the Court held that the “physical presence” test – which barred a state from levying sales or use taxes on retailers that did not have a physical presence in the state itself – was “unsound and incorrect.” The decision in South Dakota v. Wayfair, Inc. overturned a 1992 case, Quill Corp. v. North Dakota. In the earlier case, North Dakota attempted to force Quill, an office equipment firm, to pay use taxes for its customers living in North Dakota.

Snail Mail? Fail!

In 1992, the Court decided in favor of Quill, which claimed it didn’t have any real connection to North Dakota – no stores, employees or offices there at all – and was therefore exempt from the state’s authority to levy taxes. Quill’s argument relied on a much earlier case involving a company that was mailing products to customers in a state in which it did not have a physical presence.

So from the Quill decision until June 2018, the physical presence test meant that an online business was allowed to dodge sales tax, except in the state where it was incorporated.

Although South Dakota v. Wayfair, Inc. was largely similar to Quill, the Court used it as an opportunity to review the physical presence rule, which has remained a cornerstone of online commerce since its inception.

At issue in South Dakota was a state law that authorized the levy of sales tax on certain vendors located outside of the state. Supported by the retail industry, South Dakota didn’t argue that its case differed from Quill, but rather that the earlier decision needed to be reversed. The state argued that Quill harmed local IRL retailers and that the physical presence test itself was not sound.

The Supreme Court agreed, vacated the South Dakota Supreme Court judgment under review and kicked the case back down to that court.

The Takeaway

The effects of the Court’s decision on marketing and advertising are hard to anticipate, although the impact on underlying commerce will be vast.

While online retail giant Amazon will mostly shrug off the decision – it had already decided to pay sales tax in every state that levied them – other online retailers will have to begin paying up, which may depress online sales and shift some of the balance of commerce between online and brick-and-mortar retailers. Click here for a more in-depth analysis of this decision and its potential implications.