347-787-6824Recently, the Supreme Court decided the landmark case South Dakota v. Wayfair, Inc., addressing whether remote sellers of goods and services can be required to collect and remit sales taxes imposed by the consumer’s state.[1]
According to S. 106, 2016 Leg. Assembly, 91st Sess. (S. D. 2016) [hereinafter “the Act”], remote sellers must collect and remit sales tax to the state in which the goods are sold.[2] Consequently, the State of South Dakota filed for an injunction requiring respondents to register for licenses to collect and remit sales tax.[3]
Respondents Wayfair, Overstock.com, Inc., and Newegg, online merchants selling goods such as furniture and electronics, moved for summary judgment, arguing that the Act is unconstitutional.[4] The Supreme Court therefore, granted certiorari to interpret precedent cases “in light of current economic realities.”[5]
Commerce Clause and Commercial Real Estate
To decide the issue, the Court analyzed the Commerce Clause and revisited two precedent cases:
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National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967)
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Quill Corporation v. North Dakota (1992)
Both rulings determined that an out-of-state seller’s ability to collect and remit tax depended on physical presence in the state.[6][7] For instance, if a seller only permitted catalog orders, it was not considered to have a physical presence. Consequently, many online retailers escaped sales tax obligations.
Core Principles of State Taxation and Commercial Real Estate
The Court emphasized two guiding principles:
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State regulations cannot disfavor interstate commerce.
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States cannot impose undue burdens on such commerce.[8]
Moreover, combined with the Commerce Clause, these principles help courts decide outcomes in cases involving state laws.[9]
In Complete Auto Transit, Inc. v. Brady, the Court held that a state can tax interstate commerce if the tax:
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Applies to an activity with a significant connection to the state
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Is fairly apportioned
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Does not discriminate against interstate commerce
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Is sufficiently related to state-provided services[10]
Thus, the Complete Auto test became central to the Court’s reasoning.
Physical Presence Rule and Commercial Real Estate
The “significant connection” requirement stems from due process, which demands that businesses have minimum contacts with the taxing state.[11] For example, in Miller Brothers Co. v. Maryland, the Court held that there must be a direct link between the state and the transaction it wishes to tax.[12]
However, the Court found that the physical presence rule was outdated and flawed in today’s digital economy. It unfairly advantaged online businesses without a physical presence in the state while simultaneously creating market distortions.[13][14] As a result, physical retailers bore heavier tax burdens, while e-commerce companies thrived without equal obligations.
Revenue Loss and State Impact
South Dakota and other states have faced massive revenue losses—between $8 and $33 billion annually—due to the Bellas Hess and Quill rulings.[15] As a result, South Dakota residents had to pay use tax on out-of-state purchases.[16]
Since South Dakota has no state income tax, sales tax revenue is critical for funding public services such as police and fire departments.[17] Moreover, some states, like Colorado, introduced notice requirements for remote vendors, signaling future challenges over defining physical presence.[18][19]
The Supreme Court’s Decision
The Court ultimately overruled Quill and Bellas Hess, holding that the physical presence rule was untenable.[20] Applying the Complete Auto test, the Court found that respondents had significant economic and virtual contacts with South Dakota. Nevertheless, it left open the possibility that another Commerce Clause principle could challenge the Act in the future.[21]
Therefore, the decision granted South Dakota the authority to enforce its tax collection law on remote sellers.
Chief Justice Roberts’ Dissent
Chief Justice Roberts dissented, acknowledging that Bellas Hess was wrongly decided but arguing that Congress, not the Courts, should determine interstate commerce rules.[22] Furthermore, he emphasized stare decisis and claimed any harm caused by the physical presence rule was declining over time.[23]
Roberts warned that the decision could burden small businesses, raising costs and reducing product variety.[24] He argued that Congress is better positioned to weigh competing business interests and avoid drastic policy changes with unintended retroactive effects.[25]
Broader Implications for Online Retail and Real Estate
This ruling has wide-reaching implications:
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Commercial real estate benefit from leveling competition with online retailers.[26]
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Large e-commerce players like Amazon—which did not collect taxes on third-party sales in all states—face new obligations. Consequently, after the decision, Amazon shares fell, and other online marketplace stocks were expected to follow.[27]
As a result, South Dakota can now require remote sellers with over 200 transactions or $100,000+ in revenue from state residents to collect sales taxes. Consequently, this decision may encourage other states to follow suit, potentially generating $13 billion in tax revenue nationwide.[28]
Conclusion
The Supreme Court’s decision in South Dakota v. Wayfair, Inc., marks a turning point in online commerce and state taxation. By overruling outdated precedent, the Court opened the door for states to collect billions in lost tax revenue while reshaping the responsibilities of online sellers.
As the digital marketplace expands, future disputes will likely test the balance between fair taxation, interstate commerce, and small business protection.
[1] South Dakota v. Wayfair, 138 S. Ct. 2080, 2093 (2018).
[2] Id. at 2088.
[3] Id. at 2089; see U.S. Const., Art. I, §8, cl. 3.
[4] State v. Wayfair Inc., 901 N.W.2d 754, 759-60 (S.D. 2017).
[5] South Dakota, 138 S. Ct. at 2089.
[6] Id. at 2087-88. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298(199).
[7] South Dakota, 138 S. Ct. at 2089.
[8] Id. at 2084.
[9] Id.
[10] Id. at 2085.
[11] Id. at 2093. See Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945); Burger King v. Rudzewicz,
471 U.S. 462, 476 (1985).
[12] Miller Brothers Co. v. Maryland, 347 U.S. 340, 344-45 (1954); South Dakota, 138 S. Ct. at 2093.
[13] South Dakota, 138 S. Ct. at 2092.
[14] Id.
[15] Id. at 2088.
[16] Id.
[17] Id. at 2097.
[18] Id. at 2098.
[19] Id. at 2099.
[20] Id.
[21] Id.
[22] Id. at 2101.
[23] Id. at 2103.
[24] Id. at 2104.
[25] Id.
[26] Erin Stackley, Supreme Court Ruling in Wayfair Case a Win for Real Estate and States, RISMEDIA (August 12, 2018), http://rismedia.com/2018/08/12/supreme-court-ruling-wayfair-case-win-real-estate-sales/#close.
[27] Erin Stackley, Supreme Court Ruling in Wayfair Case a Win for Real Estate and States, RISMEDIA (August 12, 2018), http://rismedia.com/2018/08/12/supreme-court-ruling-wayfair-case-win-real-estate-sales/#close.
[28] Jeff Mengoli, The Impact of the Supreme Court’s Ruling in South Dakota v. Wayfair, BigCommerce, https://www.bigcommerce.com/blog/south-dakota-v-wayfair/.
