By Natalie Morgan
Online retailers have revolutionized the way we shop. From practical goods like groceries to frivolous finds like decorations for your pet’s birthday party, you can now purchase practically anything without ever leaving your home.
A recent U.S. Supreme Court decision, however, could increase the cost of online consumption. South Dakota v. Wayfair granted states the authority to collect a sales tax on online purchases made by state residents.
In the most recent episode of NCSL’s podcast, “Our American States,” NCSL Executive Director William Pound and tax policy expert Max Behlke discuss the case and what it means for state legislatures, retailers, and consumers alike.
Pound was instrumental in the creation of the NCSL Executive Committee Task force on State and Local Taxation 26 years ago.
He explained that the most recent case overturned a requirement that retailers had to be “physically present” in a state to collect sales tax. Physical presence, he said, was defined “just as you might think: a building, rented or owned, in actual operation within the borders of that state.”
The requirement of physical presence for state sales tax was established in the 1960s during National Bellas Hess v. Illinois and upheld again in the 1990s in Quill v. North Dakota. However, Pound explained that these decisions were “really before the advent of commerce over the internet.”
In South Dakota v. Wayfair, Pound said the Supreme Court determined that “you don’t have to have physical presence or that physical presence can be defined in other ways.” In this case, “South Dakota … had sufficiently defined it another way without having the physical presence or building in the state.”
Although the decades-old legal precedent was overturned based on redefining a term, NCSL's Behlke, budget and tax director for NCSL's State-Federal Relations program, called it “really a remarkable event.”
The outcome of South Dakota v. Wayfair has major ramifications as it allows “state and brick-and-mortar retailers across the country to finally be able to compete on a level playing field with online retailers.”
Behlke detailed the specifics of the 5-4 decision, noting Justices Ruth Bader Ginsburg, Clarence Thomas, Neal Gorsuch, Samuel Alito and Anthony Kennedy joined in their support of South Dakota. These justices determined that South Dakota had successfully redefined the “physical presence” clause and concluded that “their law did not impose an undue burden on interstate commerce.”
The four dissenting judges conceded, according to Behlke, that “Quill was a bad law.” Despite their disapproval of Quill, they denied support for the South Dakota v. Wayfair decision, directing Congress to address this portion of tax law rather than the Supreme Court.
Although Behlke said the Supreme Court essentially had a 9-0 opposition to Quill, the most recent case was not a complete overturn of the 1992 case.
“South Dakota relieved the burdens on interstate commerce [by]… simplifying their sales tax base and administration and stating they weren’t going to apply their law retroactively, which was a very big point in the 1992 case,” according to Behlke.
Given that South Dakota v. Wayfair was not a complete overturn of Quill, Behlke said that moving forward, there must be a “state-by-state case” approach when it comes to implementing online sales tax.
Different states will have independent timelines, according to , as it depends on “what the political dynamics are in each state, what goals they’re trying to achieve, and what policy makers really would like to have as an ideal tax code in their state.”
While the decision may require a major revision of tax laws on the part of state legislatures, Behlke determined that it will not have a significant impact on consumers as “consumers don’t shop online because of sales tax avoidance, they do so out of convenience.”
Ultimately, as Pound said, South Dakota v. Wayfair overturned a legal precedent set in the 1960s and reaffirmed in the 1990s—before the advent of internet commerce.
Regardless of what we buy online, the South Dakota v. Wayfair decision is pivotal as it marks a shift in legislation based on a shift in technology.
As Behlke concluded, “The court’s recognition of the 21st century model shows us that, going forward, we’re in a different world now than we were just a couple of decades ago.”
Natalie Morgan is an intern in NCSL's Member Outreach and Digital Communications division.