In a 5-4 decision announced on Thursday, the Supreme Court overturned a 1992 ruling in Quill vs. North Dakota that explicitly banned states from taxing companies that don’t have a physical presence within their borders.

The ruling came in the case of South Dakota vs. Wayfair, as South Dakota attempted to overturn the previous ruling. South Dakota cited their losses in not being able to collect sales tax on online sales, totaling nearly $50 million a year, and the Government Accountability Office citing nearly $14 billion in total missed tax revenue for all states. The case was a divisive issue that has been wrestled with by state governments, Congress, and large businesses alike for decades as online sales have ballooned to make up a larger percentage of commerce.

The Argument Against the Quill Ruling

The primary argument against Quill is that it was decided in 1992, before ecommerce and internet sales existed. The ruling at the time related to catalog sales and a very narrow slice of the economy. Today, billions in sales are made every year online, with large retailers like Amazon gaining an ever-greater foothold in dozens of industries.

Small retailers like local bookstores, clothing retailers, and others that have been pressured by online retailers came out in favor of overturning Quill, and President Trump has previously voiced his opposition to tax exemption for online companies.

For much of the last twenty years, Congress has intermittently brought forth potential bills to address the issue, but nothing has passed, with proponents often citing the impact of the online retail lobby.

The South Dakota vs. Wayfair Ruling

South Dakota’s challenge to the Quill ruling was precipitated by a new law passed recently that would charge retailers with more than $100,000 in sales or 200+ transactions to pay a 4.5% sales tax to the state, regardless of location. While 19 out of 20 of the largest online retailers already collect sales tax, the plaintiffs in the case – Wayfair, Overstock, and Newegg – do not, and South Dakota sued them after their new law was implemented.

Supreme Court Justice Anthony Kennedy wrote the majority in the 5-4 ruling, citing “startling revenue shortfall” for not just South Dakota, but other states who have been impacted by the Quill ruling’s ban on charging online sales tax. This was not the first such case brought before the court either. In 2015, Direct Marketing Association vs. Brohl, in which online retailers sued Colorado over a workaround law they attempted to implement. That case had a narrow ruling, however, and it was the South Dakota case that more directly targeted the decades old precedent.

Chief Justice John G. Roberts Jr., joined by Justices Elena Kagan, Sonia Sotomayor, and Stephen Breyer dissented, with Roberts noting during oral arguments that the issue seemed to be working itself out independently. Amazon and eBay already collect sales tax voluntarily and others have started implementing similar systems. Nonetheless, Justice Anthony Kennedy, joined by Justices Samuel A. Alito Jr., Clarence Thomas, Neil M. Gorsuch, and Ruth Bader Ginsberg voted in favor of vacating and remanding the Quill decision, effectively allowing states to charge online sales tax in the future (and validating all current and pending laws).

What This Means for the Future

With the Quill ruling vacated, it is unclear how states will proceed. Congress has yet to implement legislation at any level to address online sales tax, but with nearly 10,000 taxing jurisdictions in the US, it may feel greater pressure from lobbyists to provide additional guidance or structure.

Another factor is the way in which the large retailers currently collect sales tax. Amazon, for example, does collect sales tax on all direct sales, but does not for third party sellers (except in Washington and Pennsylvania). Other retailers are in similar situations, and with this ruling, the 45 states that charge sales tax can now implement a new online sales tax or enforce recently passed laws more fully.

If you want to learn more about sales tax, we suggest taking a look at our Complete Guide to Sales Tax. In it, we’ve tried to cover everything you need to know about sales tax, from both an e-commerce perspective and the needs of traditional businesses.

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