The U.S. Supreme Court’s Historic Ruling in South Dakota v. Wayfair Changes the Landscape for State Sales and Use Tax Collection

On June 19, 2018, the U.S. Supreme Court held, in a 5-4 decision written by Justice Kennedy, that states may require an out-of-state retailer to collect and remit sales tax on purchases by residents within that state. [South Dakota v. Wayfair]. Until now, the states could not compel any retailer to collect the tax unless it had a physical presence in the state.

Wayfair is a historic ruling that will change the landscape for state sales tax collection. Many states have already enacted legislation in anticipation of a favorable ruling in Wayfair, and it is anticipated that the states that have not done so will move quickly to enact such legislation to increase their revenues.

Wayfair also leaves many unanswered questions, including whether the decision is limited to legislation that closely mirrors South Dakota’s statute or to states that are members of the Streamlined Sales and Use Tax Agreement, like South Dakota. Unless Congress acts to provide consistent treatment among the states, Wayfair may result in a variety of efforts to maximize state sales tax collections.


Since 1967, the Court has held that, unless a retailer maintains a physical presence within the state, the state lacks the power under the U.S. Constitution to require the retailer to collect sales tax on its sales into the state. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 5014 U.S. 298 (1992). For years, states have complained that the physical presence test does not reflect the current economy, gives out-of-state retailers an unfair advantage, and results in significant revenue losses by the states.

In 2016, South Dakota enacted legislation requiring out-of-state retailers to collect and remit sales taxes if they delivered more than $100,000 of goods or services into South Dakota or engaged in 200 or more separate transactions for the delivery of goods and services into the state on an annual basis. The legislation was not retroactive. South Dakota is a member of the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs. Wayfair, Inc.,, Inc., and Newegg, Inc. (“Respondents”) were online merchants with no employees or real estate in South Dakota. None of the Respondents collected sales tax in South Dakota.

South Dakota filed suit in state court, seeking a declaration that the Act’s requirements were valid and applicable to Respondents and an injunction requiring Respondents to collect and remit sales taxes in South Dakota. The trial court granted Respondents’ motion for summary judgment, which was affirmed by the South Dakota Supreme Court on the ground that Quill was the controlling precedent. The Court granted certiorari to reconsider the scope and validity of the physical presence test.

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