In a highly anticipated decision, the U.S. Supreme Court has ruled in South Dakota v. Wayfair, Inc., that internet retailers can be required to collect sales and use tax in states in which they lack a physical presence, overturning 26 years of precedent barring states from taxing out-of-state sellers.

As we previously reported, South Dakota brought the suit, acknowledging that its position defies the Supreme Court’s holding in the 1992 case Quill Corp v. North Dakota, by arguing that the development of the internet and ensuing growth in online shopping necessitate reconsideration of the requirement that a business have a physical presence within a state in order to be subject to that state’s sales tax collection obligations.

By a 5-4 vote, the court found for South Dakota, holding that the state’s 2016 law mandating that certain out-of-state sellers collect and remit tax regardless of whether they had a physical presence in South Dakota, is permissible under the commerce clause.

The Supreme Court vacated and remanded the opinion of the South Dakota Supreme Court, which previously found the South Dakota law unconstitutional because it was contrary to Quill.   Justice Anthony Kennedy wrote the opinion for the majority.  In his concurrence in a prior case, he had stated that the court should consider an appropriate challenge to Quill.

In overruling Quill, Judge Kennedy noted that “[a]lthough we approach the reconsideration of our decisions with the utmost caution, stare decisis is not an inexorable command.”  He wrote that Quill’s physical presence rule is “flawed on its own terms” and poses a “serious inequity” by requiring retailers with a physical presence to collect sales tax, while their online counterparts do not.  He noted, for example, that “[s]tates are already confronting the complexities of defining physical presence.”

Judge Kennedy concluded that “the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the ‘far-reaching systemic and structural changes in the economy’ and ‘many other societal dimensions’ caused by the Cyber Age.”

Joining him were Justices Ruth Bader Ginsburg, Clarence Thomas, Samuel Alito, and Neil Gorsuch. Justices Thomas and Gorsuch, longtime foes of the dormant commerce clause, filed concurring opinions.

In a dissent, Chief Justice John Roberts said the remote taxation issue should have been left to Congress. He was joined by Justices Elena Kagan, Sonia Sotomayor and Stephen Breyer. Chief Justice Roberts also expressed strong concern about the court turning its back on stare decisis.

“I would let Congress decide whether to depart from the physical presence rule that has governed this area for half a century,” Justice Roberts wrote.

The overturning of Quill, giving states the freedom to reach beyond their borders to compel retailers to collect and remit tax, is the most groundbreaking event in state taxation in decades.  A report from the Government Accountability Office in December 2017 found that states are losing up to $13 billion because they could not compel remote sellers, especially internet sellers, to collect and remit tax.

Several states have legislation mirroring South Dakota’s ready to go, and many others are expected to follow.

For questions or more information, contact the author, Charles Lin, at 949-223-7145, or