Supreme Court Hands States A Big Win On Taxation Of Internet Sales

Overruling precedent dating back 51 years, the Court has ruled that states can require businesses that sell to residents within their state collect and remit appropriate sales taxes.

The Supreme Court handed states a big victory today, ruling that the Internet sales could be subject to sales taxes charged by the state where the customer resides regardless of whether or not the seller has a physical presence in the state in question:

WASHINGTON — Internet retailers can be required to collect sales taxes in states where they have no physical presence, the Supreme Court ruled on Thursday.

Brick-and-mortar businesses have long complained that they are disadvantaged by having to charge sales taxes while many of their online competitors do not. States have said that they are missing out on tens of billions of dollars in annual revenue under a 1992 Supreme Court ruling that helped spur the rise of internet shopping.

On Thursday, the court overruled that ruling, Quill Corporation v. North Dakota, which had said that the Constitution bars states from requiring businesses to collect sales taxes unless they have a substantial connection to the state.

Shares in Amazon were down just 1 percent in morning trading after the ruling, at $1,731.59. But other e-commerce companies suffered far tougher blows: Shares in Etsy, the marketplace for artisanal crafts, fell 4.5 percent, to $42.21, while those in Wayfair, a popular home goods seller, were down 3.2 percent, at $112.42.

Writing for the majority in the 5-to-4 ruling, Justice Anthony M. Kennedy said the Quill decision had distorted the nation’s economy and had caused states to lose annual tax revenues between $8 billion and $33 billion.

“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” he wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”

Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch joined the majority opinion.

In dissent, Chief Justice John G. Roberts Jr. agreed that the court’s rulings in this area had been “wrongly decided.” But he said there were insufficient reasons to overrule the precedents and that Congress should have been left to address the matter.

“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” the chief justice wrote. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”

Justices Stephen G. Breyer, Sonia Sotomayor and Elena Kagan joined the dissent.

More from The Washington Post:

A divided Supreme Court ruled Thursday that states may require online retailers to collect billions of dollars of sales tax revenue owed to them.

The decision was 5 to 4.

More than 40 states and the Trump administration asked the Supreme Court to overturn its 1992 decision in Quill v. North Dakota that restricts states from collecting sales tax from retailers without a physical presence in those states. They said a decision in a case involving mail-order catalogues is obsolete in an era of e-commerce.

Justice Anthony M. Kennedy, who wrote Thursday’s majority decision, had earlier called for the court to reconsider the decision.

Kennedy wrote that dramatic technological changes had made the court’s previous ruling obsolete, and that it unfairly disadvantaged traditional brick and mortar stores.

“A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores,” Kennedy wrote.

“Yet the continuous and pervasive virtual presence of retailers today is, under Quill simply irrelevant. This court should not maintain a rule that ignores these substantial virtual connections to the state.”

He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch.

Chief Justice John G. Roberts Jr. wrote the dissent. He said the court should not be doing the work of Congress, even if its earlier precedents are open to question.

“E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” he wrote.

“Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”

South Dakota brought the challenge. It passed a law requiring retailers with more than $100,000 in annual sales or 200 transactions in the state to pay a 4.5 percent tax. Although technically consumers are required to pay sales tax on all purchases, it is practically impossible to collect without the retailer applying it at the point of sale.

A Government Accountability Office audit said states missed out on about $13.7 billion in tax revenue in 2017.

Retailers said overturning Quill would allow states to go far beyond the model legislation that South Dakota passed, requiring collection by retailers with a single sale in a state or perhaps trying to force the companies to comply retroactively.

Congress, the retailers argued, could implement national rules rather than open up the companies to having to deal with the specific requirements of what they say are 12,000 taxing jurisdictions nationwide.

Lyle Denniston comments:

Justice Anthony M. Kennedy, who wrote the majority ruling, admitted that the Court itself was wrong in maintaining – for 51 years – the constitutional rule that a state government may not collect sales tax from an out-of-state retailer unless that company had a “physical presence” in the state – a store, a staff of employees, or a warehouse, for example.

Kennedy said that the part of the Constitution that controls business activity in America – the Commerce Clause in Article I – did not give the courts the power “to create market distortions.”

At an economically practical level, the decision means that Internet sellers lose a competitive advantage they had over traditional retailers to sell at lower prices, and they now lose the right to claim that their sales are free of sales tax.  That is a marketing tool, the Court noted, used by one of the big firms involved – Wayfair, Inc., a major seller of home goods.  Also involved were another large seller of home goods and jewelry, Overstock, Inc., and Newegg, Inc., a major seller of consumer electronics.

Although Congress for years has been hearing the complaints of state governments and of an increasing challenged retail store industry about the Court’s protection of out-of-state sellers, the lawmakers on Capitol Hill have never been able to forge an answer.

Four members of the Court, dissenting in an opinion written by Chief Justice John G. Roberts, Jr., argued in vain that the problem should have been left to Congress to solve.  The change made by the majority, the dissenters said, has “the potential to disrupt the development of such a critical segment of the economy.”  (The dissenters did agree that the half-century old precedent struck down Monday was decided wrongly, but they said any remedy should have been up to Congress.”)

The most significant thing about this decision is that it effectively overrules not one but two previous Supreme Court cases that formed the basis of the so-called “physical presence” rule that the Court has rejected today. The first such decision was handed down in 1967 in National Bellas Haas v. Department of Revenue. In that case, the Court ruled that a mail-order catalog business was not required to collect sales tax on behalf of states in which it does not have a physical presence. Twenty-six years later, the Court ruled in 1993 in Quill Corp. v. South Dakota in a manner that somewhat overruled the central holding of Bellas Haas but did not completely throw the precedent out. Specifically, the Quill ruling still established that the Commerce Clause prevented states from requiring businesses without an in-state physical presence from collecting sales taxes. Even though both Bellas Haas and Quill pre-date the vast expansion of the Internet that began with the creation of the World Wide Web and the rise of e-commerce sites or smaller businesses who used e-commerce portals to sell products to people living in other states, their central holding still formed the basis for how sales over the Internet were treated for sales tax purposes. Basically, of course, the rule has been that online merchants, regardless of their size, are not required to collect sales tax in jurisdictions that they do not have a physical presence in. This has led to much consternation on the part of states who see themselves as being deprived of revenue as more and more business shifted online and on the part of bricks-and-mortar retailers who assert that the exemption was giving online retailers an unfair advantage over them in a marketplace that was already becoming difficult for them.

In it’s ruling today, the Court explicitly rejected the “physical presence” rule that had been established in Bellas Haas and Quill. Specifically, the majority ruled that, given the extent to which the Internet’s “prevalence and power have changed the dynamics of the national economy,” this rule no longer made any sense. Indeed, this appears to be a conclusion that both the majority and the dissent agreed upon, with the dissent arguing mainly that this is an area where Congress should act rather than the Courts given the nationwide implications for the ruling. As a matter of law, though, it seems clear that the majority has the better argument here. The “physical presence” rule that was established in Bellas Haas and Quill may have made sense in an era where people shopped via catlogs, but it doesn’t make sense in the modern era when more and more commerce is being done online, and where the major internet retailers are beyond question no longer in the mind of position where they were in the 1990s when the still burgeoning world of e-commerce was still in its infancy and arguably needed to be protected from having to figure out how to comply with local and state sales tax rules.

In its decision in the Quill case, and in its decision today, the Supreme Court did note that the exemption could be ended or modified by Congressional legislation. Toward that end, there have been several efforts in the past several years to pass legislation that would have mandated the collection of sales taxes by out of state businesses, although those efforts have not succeeded in any measure passing either chamber of Congress. In order to address the objections of smaller retailers who lack the resources of large businesses such as Amazon, those bills have included provisions that provide that the obligation to collect sales taxes would only kick in when a business had made sales above a certain dollar amount to a specific state. Other proposals included requirements that the states and localities that impose sales taxes to work together to provide a method that could be used nationwide to assist these smaller retailers in calculating, collecting, and remitting sales taxes to the proper jurisdictions. Proposals such as this would protect small businesses that have only limited sales in a state in which they have no physical presence from the financial burden of having to account for the sales tax laws of states and localities that they have no connection to beyond shipping something to a customer who happens to be located there.

In theory, of course, Congress could effectively reverse the Court’s ruling here thanks to its authority under the Commerce Clause and reinstate the “physical presence” rule established by Bellas Haas and Quill, but it seems unlikely that will happen for several reasons. For one thing, as noted above previous efforts by Congress to act in this area have barely made it out of committee in either chamber never mind to a final floor vote. For another, the lobbying positions of many of the major players in this debate have changed significantly in recent years. In the past, companies such as Amazon have argued along with smaller retailers that they should be exempt from sales taxes in states where they don’t do business. More recently, though, these larger companies have reversed their decisions and now seem to be on the same side as the states in arguing in favor of allowing states to collect sales tax from out-of-state retailers. This means that an effort to get a measure reinstating the Quill rule through Congress would most likely fail.

A more likely outcome in Congress could be a law that would contain some of the protections for smaller retailers that I mentioned above such as an annual sales revenue limit or the establishment of nationwide means for smaller businesses to easily calculate, collect, and remit sales tax revenues to all the jurisdictions that have such laws. At the same time, it’s likely that this decision will lead larger companies to bring to the market back office services that could accomplish the same thing. Proposals such as this seem like a reasonable accommodation to both the interests of the states that collect sales taxes and small businesses that may not be able to track the sales tax rates in all the jurisdictions they may ship to at one time or another.

For most people who primarily do business with larger online retailers, of course, the impact of decisions will be limited at best. Thanks largely to the fact that they have expanded their locations nationwide in an effort to increase their ability to ship merchandise quickly and efficiently, online retailers such as Amazon have been required to collect sales taxes in an increasing number of jurisdictions. This is because, even under the Quill “physical presence” rule, all that was required was for a business to have a physical presence of any kind in a given state and they would become legally obligated to collect sales taxes in that jurisdictions. For example, if there is an Amazon distribution center in your state and your state is one of the 46 that charges sales taxes, then you’ve already been paying sales taxes on your online purchases on these sites. All this decision means for these larger companies is that they will now be required to also charge sales tax in jurisdictions where they don’t have a presence yet. Given their size, though, the relative cost of this will be minimal at best.

All of this will likely take some time to play itself out. Many states and localities that do charges sales tax, for example, will probably find it necessary to make adjustments in their laws to allow for the taxation of online and other out-of-state sales as well as the means to track such transactions in some manner. For some states where the legislature only meets once a year, this will mean that legislative action may not happen until 2019. Other states will probably act more quickly, especially given the fact that this will mean at least somewhat of an increase in tax revenues that they will want to take advantage of the increased revenue as soon as possible. Congressional action of the kind I described above is also unlikely in the short term given the relatively short amount of time between now and the end of September when they will adjourn for the midterm campaign. It’s possible that we might see some effort at in this regard during the post-election lame-duck session but more likely that any such action won’t happen until the new Congress takes office next January.

In any case, the days of the sales tax-free Internet are over.

Here’s the opinion:

South Dakota v. Wayfair, Inc. Et Al Opinion by Doug Mataconis on Scribd

FILED UNDER: Law and the Courts, Supreme Court, , , , , , , , , , , , ,
Doug Mataconis
About Doug Mataconis
Doug Mataconis held a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020. He passed far too young in July 2021.


  1. Michael Reynolds says:

    Given that Amazon dominates on-line retail and has physical locations in all the major states, I don’t expect this will have much impact on them, or on my state of California’s tax receipts. Amazon already has brick-and-mortar, no-human-employee stores in 20 states. I suppose this makes that expansion a bit easier for them.

  2. Stormy Dragon says:

    If having an internet site available in South Dakota is enough to grant South Dakota the power to enforce tax regulations on organizations based in other states, does the same hold true for other regulations? If a clinic in California has a website, are they now subject to Iowa’s new abortion law?

  3. Michael Reynolds says:

    @Stormy Dragon:
    Um. . . what? No, SD, that’s not what it means.

  4. @Michael Reynolds:

    I’ve been paying Virginia sales tax on Amazon for several years now. They set up their first distribution center here down in Richmond even before I had started blogging here at OTB and now have at least one closer to Northern Virginia that I’m aware. The big advantage of that is that we’re now included in one of the areas where same-day delivery is available for some products, and free if you have Prime. I’ve used it a few times and it’s pretty nice. At this point I think they only lack in-state presence in a handful of states, and I’m sure that will expand soon enough.

    The bigger issue will be for smaller businesses that make use of e-commerce. One example I can think of is a small family-owned butcher shop in the Pennsylvania town where my Mom grew up. They have a website that allows you to order homemade kielbasi and other products. It’s smoked and vacuum-sealed so it’s easy to ship long distances. I don’t imagine that out of state sales are a big part of their business, though, and I’m not sure how businesses like that will be able to keep up with sales tax laws in the 46 states that have sales taxes, not to mention the states where some localities have additional sales taxes of their own (such as New York City).

    One of the proposals before Congress in previous years would have kept the exemption in place for businesses that average under $1,000,000 in out of state sales over a period of 2-3 years. That could be one solution.

  5. @Stormy Dragon:

    If a clinic in California has a website, are they now subject to Iowa’s new abortion law?

    This case only dealt with the power of the states to collect sales taxes on online sales to people residing within their state.

  6. teve tory says:

    I have zero problems with Amazon having to pay the same taxes as a Mom and Pop Store down the street.

  7. Stormy Dragon says:

    @Michael Reynolds:

    Why not? Clinics with a physical presence in Iowa are also “at a competitive disadvantage relative to remote sellers” who can “avoid the regulatory burdens of [abortion regulation] and can offer de facto lower prices”.

  8. Stormy Dragon says:

    @teve tory:

    Neither does Amazon. At their size it’s easy for them to assign people to keep up with hundreds of different tax jurisdictions around the country. The places that are going to be negatively impacted are new startups. So this ruling helps further entrench Amazon by strangling potential future competitors.

  9. teve tory says:

    @Doug Mataconis:

    One of the proposals before Congress in previous years would have kept the exemption in place for businesses that average under $1,000,000 in out of state sales over a period of 2-3 years. That could be one solution.

    I think that exemption would be fine. I even support it as a way to give small businesses a little bit less disadvantage against behemoths like Amazon. But also it’s not like the small-business deli is writings its own payment-processing code. It’s probably renting it as SaaS (Software as a Service). As such, whoever’s selling the payment processing service could pretty easily write in code that automates the state sales taxes.

  10. Just Another Ex-Republican says:

    Interesting alignment of the 5-4 judges in this case. Nice to see some things still don’t automatically break into the liberal vs conservative morass.

  11. wr says:

    @Stormy Dragon: “Clinics with a physical presence in Iowa are also “at a competitive disadvantage relative to remote sellers” who can “avoid the regulatory burdens of [abortion regulation] and can offer de facto lower prices”.”

    Because the doctors would have to have really long arms to operate on a patient in California from a clinic in Idaho.

    Why are you being deliberately stupid?

  12. @teve tory:

    You make a fair point and, as I note in the post, this case is likely to result in some businesses moving in to provide such services to small businesses who want to set up an e-commerce portal. I can see Amazon and/or Google taking this under their wing as a part of some of the back office services they already provide to businesses.

  13. @Just Another Ex-Republican:

    There have been a couple cases like that this term. Most of them not cases that would be of interest to anyone other than the parties and people who specialize in areas like bankruptcy law, but it’s always interesting when it happens.

    As I noted in the post, though, both the Majority and the Dissent agreed that the precedents in Baas Hallas and Quill needed to be overruled, they disagreed about who should do that.

  14. @teve tory:

    Amazon isn’t really the issue anymore. As I note in the post, they have not taken the position that the exemption should say in place for many years.

  15. @Stormy Dragon:

    This only becomes an issue because of the interstate nature of internet sales.

    There’s no such thing as an “interstate abortion.”

  16. Roger says:

    The most interesting thing about this opinion to me is its demonstration of how much we have allowed guns, God, and gays issues to distort what it means to be liberal or conservative. The majority opinion, upsetting half a century of settled precedent in a field where Congress could have changed the law but chose not to, is profoundly unconservative in the classical sense of that term, but the three most “conservative” members of the court signed on to it. Roberts’ discussion of stare decisis, joined by all but one of the “liberal” justices, champions what used to be the conservative notion that legislatures, not courts, should change the law. Whatever you think of the merits of requiring online sellers to collect sales tax, I fear that we will regret Ginsberg’s vote when we see how this case is put to use in ignoring other precedents that Thomas, Alito, and Gorsuch don’t care for.

  17. Kathy says:

    It strikes me that the problem, and cost, lies not in collecting state sales taxes, which should be easily automated, but in accounting for such charges and then turning over the moneys to the various states.

    Now, does this impact international e-commerce? If someone in California buys clothes from a Chinese website, do the Chinese have to collect the state sales tax? If they refuse, what recourse is there for the states? And/or would the buyers be liable for the missing tax?

  18. inhumans99 says:

    @teve tory:

    ??? They are not tax cheats and pay their fair share to the govenment, also, as noted in the comments section us CA folks already have to pay a pretty hefty sales tax on Amazon purchases, and it has been that way for quite a few years.

    The irony of this ruling is that as Doug points out it is most likely to put a kink in the hose of those very same mom and pop business that President Trump claims he would like to help, unless there are provisions in the rule allowing for some relief to be applied to businesses that do not derive a significant portion of their revenue from out of state sales.

    If ever there was a group of voters who voted for someone who says he loves them but is doing more to hasten their demise than any President in my lifetime (I turn 47 in September) it has to be the modern GOP voter.

  19. teve tory says:

    @inhumans99: @Doug Mataconis: I was using Amazon as a synecdoche, sorry if that wasn’t clear. My point was that it wouldn’t be fair to allow huge global corporation X to have an advantage w/r/t sales taxes that a small business Y nearby wouldn’t have simply because they happen to be in your state.

  20. @Kathy:

    Generally speaking, tax issues involving international commerce are governed by complex tax treaties. Congress has no authority in the matter since it does not fall within “interstate commerce.”

  21. teve tory says:

    (Though if we just want to talk about Amazon I’d recommend The Everything Store if you want some glimpses into how bad Jeff Bezos sucks. Imagine an even worse version of Sam Walton.)

  22. Kathy says:

    @Doug Mataconis:

    I’ve never been charged sales tax from any purchases made online from the US, or for that matter from China or Europe. So there’s that.

  23. george says:


    On the other hand, most of the liberals voted against it, so maybe its simply not a conservative-liberal issue.

    And in fact, aren’t most supreme court decisions not split on liberal-conservative lines? I read somewhere that the majority of decisions are across the board.

  24. HankP says:

    For all the people worried about how hard it will be for small businesses to calculate sales taxes, Quickbooks does it automatically as part of Quickbooks online. There are also services like Avalara that start at $50/year to do all sales tax calculations for the business. So that is not really a problem any more.

  25. Sleeping Dog says:

    The determination of the tax is a simple data base formula. Payment is trickier, I expect that banks will step in and offer a transfer service for the tax receipts to the states. The question will be who pays for this service.

  26. Jc says:

    It’s the registering to collect, collecting the appropriate sales, use, TPT, B&O etc… Type sales taxes and the remittance. As long as there is a threshold as Doug states, but don’t be surprised if there is not. It will be state by state and they don’t care about your problems as a small business, they will want you to register and collect.

  27. Jc says:

    @Sleeping Dog: most states make remittance easier, but some areas will be a headache. Alabama counties and Louisiana parishes come to mind. You will have to register with the state, then as well with the individual localities that collect on their own. Arizona is another. It will be a pain in the butt for mom and pop shops that sell a lot through web

  28. grumpy realist says:

    @Jc: Given that this all deals with internet sales, I suspect what we will very soon see is some sort of software widget that is added to CartMart or any other of the shopping basket apps which takes in a) the location of the buyer b) the location of the seller c) what is being sold, calculates whatever sales tax is required, and notifies the relevant parties.

    The major problem will be continually updating the tax database to keep track of the fiddlely 1% increases municipal jurisdictions/politicians end up trying to sneak on top on obscure categories in order to raise $money$ for their local pet projects.