In a sign of how far e-commerce has changed in just a little over two decades, on June 21, 2018, the U.S. Supreme Court overturned its 1992 decision of Quill v. North Dakota (504 U.S. 298).  The implications of this relatively sudden about-face in Supreme Court precedence will be felt for years to come, and likely have effects on interstate commerce far beyond state's ability to simply collect sales taxes.

The Quill decision held that a state may not require a business, which has no physical presence in the State, to collect its sales tax. As a result, states were required to collect the tax directly from the in-state consumers, which not surprisingly often failed to remit the taxes to the state.  In South Dakota alone, the state estimated that it failed to collect between $48 and $58 million annually in sales taxes from online purchases.  For years brick and mortar stores throughout the country claimed unequal treatment, and argued that online retailers, who did not have to collect sales tax, were at a significant advantage. This advantage may have seemed negligible at the dawn of the internet in 1992, but in the intervening 26 years, resulted in billions of dollars of taxes left uncollected, and a significant incentive for consumers to make online purchases rather than from entities with in-state physical locations.

In a an uncharacteristically harsh rebuke of prior Supreme Court decisions, Justice Kennedy speaking for the majority, stated the physical presence rule in Quill is an "unsound and incorrect" interpretation of the Commerce Clause, and that the correct standard for determining the constitutionality of a state tax law is whether the tax applies to an activity that has "substantial nexus" with the taxing state. While the court did not state expressly what constitutes a substantial nexus, by allowing South Dakota's law to stand, it implied that such a nexus would include at least $100,000 in annual sales to a state, or 200 individual transactions.

Given such a relatively low "substantial nexus" threshold, States will now have the ability to tax online business far smaller than mega e-commerce retailers, and even small business engaged in on-line sales will need to track the destination of their sales and understand the law of the state where purchases are being sent.

The implication of this ruling will be felt far beyond traditional retail stores.  For example, while the vast majority of states do not tax medical services, a few do.  With the significant rise in online services such as telehealth providers, who in most states are unaccustomed with being taxed, may find themselves in noncompliance with the law in the state with which they are providing services.  Furthermore, the ruling in Wayfair, is not limited to sales tax, and leaves open any tax by a state on an entity having a "substantial nexus" with that state.

Lastly, it is not certain how far the Wayfair decision will impact other decisions on the ability of state to regulate and tax activity originating outside of their borders, or how the recent retirement of Justice Kennedy will affect future interpretations of Wayfair. As a result, the full ramifications of the Supreme Court's decision in South Dakota v. Wayfair will not be known for years to come.

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