Today, the United States Supreme Court in South Dakota v. Wayfair, Inc., decided that a state may require an out-of-state seller with no physical presence in that state to collect and remit sales tax. In doing so, the Court overruled fifty years of precedent.

In the past, the Court held liability to collect and remit sales tax depended on whether the seller had a physical presence in the state that was seeking to collect the tax. The Court previously held that mere shipment of an order into the consumer’s state did not satisfy that requirement. In those instances, the states could not compel the seller to collect the sales tax but rather relied on the consumer to remit the tax. The studies reviewed by the Court indicated that practice cost the states between eight and thirty-three billion dollars in revenue every year.

South Dakota, because of that loss of revenue, passed a law requiring sellers to collect the sales tax as if they had a physical presence in the state. The respondents Wayfair Incorporated, Overstock.com Incorporated and Newegg Incorporated all sold a significant amount of goods into South Dakota but had no employees or real estate in South Dakota. South Dakota sued to enforce its law and lost both at the trial level and in the South Dakota Supreme Court because the Supreme Court’s precedent was directly contrary to the South Dakota Law. The United States Supreme Court then accepted review of the case.

In its review of the case, the Court noted that the physical presence requirement allows purchasers to avoid paying tax to remote sellers and inappropriately burdens businesses with physical presences in those locations. The Court noted that the power to tax is contained in the Commerce Clause of the Constitution and that clause was designed to prevent states from engaging in economic discrimination so that they would not divide into isolated separable units.

The Court concluded that the Commerce Clause does not “relieve those engaged in interstate commerce from their just share of state tax burden.” The Court then went on to consider the changes in the marketplace since its previous decisions were issued. The majority concluded that the physical presence rule is artificial and is no longer applicable in today’s digital marketplace. The Court opined that it was inappropriate to continue to maintain a rule that ignores “substantial virtual connections” to the state. Given those changes, the Court held that the “physical presence rule undermines that necessary confidence by giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes.” Thus, the Court overruled its precedent to allow states to require out-of-state sellers to collect and remit sales tax.

The Court’s opinion may have far reaching implications for the states and their financing. They may now access the vast sales volume of companies like Overstock and Amazon to collect lawfully imposed but seldom remitted sales taxes. The states will of course see this as an additional revenue stream and one would expect states, if they have not already done so, to develop and implement processes by which they can realize the tax revenue now open to them by the Court’s decision in South Dakota v. Wayfair, Inc.

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Jim Paone is chair of the Business Law and Litigation Department. He is an experienced litigator with extensive state and federal court experience and has been designated by the New Jersey Supreme Court as a Certified Civil Trial Attorney. He is a frequent speaker on Civil and Trial Practice matters.