In its 5-4 decision in South Dakota v. Wayfair, the U.S. Supreme Court gave states the authority to require online retailers to collect state sales taxes even if the retailer has no physical presence in a state. The decision overturned pre-internet era rulings that had prohibited states from forcing online retailers to collect sales taxes unless a retailer had a “physical presence” in a state.
Wayfair will likely increase states’ sales tax revenue. The Supreme Court noted that the physical presence standard may have cost states up to $33 billion in sales tax revenue every year. South Dakota alone estimated that it lost $48 to $58 million yearly. This was a serious problem for states like South Dakota that do not have an income tax.
On the other hand, the decision will drive up costs for small online retailers, and those without the resources to comply with numerous taxing jurisdictions will be hit hard. Members of the House Judiciary Committee issued a statement calling Wayfair a “nightmare for … small online sellers, who will now have to comply with the different tax rates and rules of, and be subject to audits by, over 10,000 taxing jurisdictions across the U.S.”
But Justice Anthony Kennedy, who authored the majority opinion in Wayfair, thought there was “nothing unfair about requiring companies that avail themselves of the states’ benefits to bear an equal share of the burden of tax collection.”
Regardless of the policy arguments, the Wayfair ruling will likely significantly increase compliance costs and state audits for online retailers.
Now online retailers must determine whether the states where they have no physical presence require them to collect and remit sales tax. A state may require an online retailer to collect and remit sales tax based on the revenue the online retailer generates or the number of sales it makes in the state.
Online retailers should bear in mind, however, that states cannot impose collection requirements on an online retailer if it does not have a substantial nexus in the state.