Under a 1992 ruling by the Supreme Court, states could only force a business with a physical presence, such as an office or warehouse, in that state to collect sales tax on out-of-state purchases. The ruling allowed small online sellers to avoid charging sales tax to customers in different states. While paying the tax was the responsibility of the buyer, almost nobody followed through.
On Thursday (June 21), the Supreme Court overturned the 1992 decision and ruled that states do have the power to force out-of-state retailers to pay sales tax on purchases they ship to the state. The 5-4 ruling was a huge win for the states, which have been fighting against the physical presence doctrine for years, arguing it costs them billions of dollars in revenue annually.
Justice Anthony Kennedy wrote the majority opinion explaining that "the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause."
"Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause," he wrote.
The high court was hearing a case from South Dakota after the state passed a law aimed specifically at trying to overturn the previous Supreme Court rulings. The law mandated that any business that made more than $100,000 in annual sales or 200 annual transactions in the state was required to collect sales tax and remit it to the state on all purchases shipped to South Dakota. To enforce its new law, South Dakota filed a lawsuit against Overstock.com, electronics retailer Newegg, and home goods company Wayfair.
The ruling is not just a major victory for the states, but also for large online retailers, such as Amazon, since they have a physical presence in most states and have already been collecting the sales tax from customers.
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