End of Physical Presence Rule: Internet Sales Now Subject to Collection of Sales Tax

The Supreme Court handed down its decision in South Dakota v. Wayfair, Inc. on June 21, 2018. For those businesses that make extensive use of Internet sales, the decision now stands to change the competitive landscape of retailing.  States will now have the right to force online retailers and other out-of-state sellers to collect sales taxes even when those out-of-state sellers have no physical presence in the state assessing the tax. The case holding is sure to end the competitive advantage provided to Internet retailers by selling goods and services without having to collect sales tax.

States have been losing out on billions in sales tax revenue over the years and the retailers with physical stores, warehouses, and sales forces within the states were at a competitive pricing disadvantage. Some Internet retailers, Amazon being the most notable, apparently saw the writing on the wall and have already begun collecting sales tax regardless of whether they have a physical presence in the buyer’s state.

The case ends the long history of the high court’s cases that held that a business must have a physical presence in a state in order for that state to force businesses to collect sales tax. The brick and mortar retailers have long complained that the Internet retailers had a distinct advantage by not having to collect sales tax. The ruling brings sales taxation more in line with the reality of vast Internet sales volume that has overtaken retail store sales.

The court favorably noted provisions of the South Dakota law that exempt small retailers and avoids any effort to collect taxes retroactively on prior sales. Many states are likely to study these and other parts of the Wayfair decision to incorporate them into their own legislation. Every state with a sales tax is likely to move fast to enact legislation or regulations to enforce sales tax collection from out-of-state sellers. Retail sellers must now consider the impact of this court decision on their pricing, competitive strategy, building and location strategies, and monitor the roll out of the sales tax enforcement laws which are sure to come over the next year or two.

If you have any questions on how this decision may impact your business please contact our Business Group attorneys.