South Dakota v. Wayfair, Inc.

Background

South Dakota passed a law (S.B.106) requiring out-of-state sellers to collect state sales tax if they make over $100,000 in sales or 200 transactions in the State each year. Three large online retailers with no physical presence in South Dakota (Wayfair, Overstock, and Newegg) challenged the law after state courts relied on earlier cases saying a seller must have a physical presence to be forced to collect sales taxes. The Supreme Court agreed to decide whether that physical-presence rule still controls.

Reasoning

The Court held that the old physical-presence rule from Bellas Hess and Quill was unsound and overruled those precedents. Instead, it returned to the longstanding four-part test for state taxes and focused on whether a seller has a “substantial nexus” with the State. The Court found South Dakota’s thresholds and the large virtual and economic connections of the respondents satisfy that nexus. The Justices left other Commerce Clause challenges unresolved and sent the case back for further proceedings.

Real world impact

The decision lets States require many large online sellers to collect and remit sales taxes when they meet economic or transaction thresholds, which can increase state revenue and reduce tax advantages for local competitors. South Dakota’s law also includes protections: no retroactive liability, a safe harbor for small sellers, and participation in a streamlined tax system. The ruling does not dispose of every constitutional challenge; lower courts may still consider burdens, apportionment, or discrimination claims on remand.

Dissents or concurrances

A dissent argued the Court should leave the rule to Congress because overturning it now may impose heavy compliance costs and harm small sellers; two concurring opinions agreed with overruling and raised broader questions about the dormant Commerce Clause.