South Dakota v. Wayfair, Inc.
The Supreme Court ruled that states can require out-of-state online retailers to collect sales tax even if the retailer has no physical presence there, overturning two earlier decisions that had barred states from doing so.
The ruling clears the way for states to collect billions of dollars a year in sales tax revenue that had been going uncollected as online shopping grew, but it also means many internet sellers now face new tax-collection duties across the country.
“Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”
The majority explains why the old physical-presence rule needed to be overturned.
How it got here: South Dakota sued the retailers in state court; the trial court and the South Dakota Supreme Court ruled for the retailers based on existing precedent, and South Dakota asked the Supreme Court to review that precedent.
The Case in Depth
What happened
South Dakota passed a law requiring out-of-state internet retailers to collect and remit sales tax if they did enough business in the state, even without a store or warehouse there. Wayfair, Overstock, and Newegg — major online retailers with no employees or property in South Dakota — met the law's sales thresholds but refused to collect the tax, arguing that decades-old Supreme Court rulings shielded them because they lacked a physical presence in the state.
The question before the Court
Could a state require an online retailer with no stores or warehouses there to collect sales tax on purchases made by its residents?
The Court's answer
Yes — the Court ruled that South Dakota could require out-of-state online retailers like Wayfair to collect sales tax from South Dakota customers, even though the sellers had no stores, warehouses, or employees there. The Court threw out its own prior rule that a business needed a physical presence in a state before that state could make it collect sales tax, calling that rule an outdated and arbitrary distinction that no longer matched how commerce actually works in the internet era.
Because South Dakota's law only applied to sellers doing a substantial amount of business in the state, and Wayfair and the other retailers clearly met that threshold, the Court found the tax requirement valid under its general test for state taxes on interstate commerce. The case was sent back to let South Dakota's courts consider any remaining objections to the specific law.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Online retailers of all sizes may now need to track and collect sales tax in thousands of different state and local jurisdictions, raising compliance costs, especially for small businesses. States gain a major new revenue source to fund schools, roads, and other services, and brick-and-mortar stores no longer face a built-in price disadvantage against online-only competitors.
What changes now
The South Dakota Supreme Court's ruling for the retailers is undone, and the case goes back to that court to consider any remaining arguments the retailers may raise, since the physical-presence rule that had shielded them no longer applies. Other states with similar remote-seller tax laws can now enforce them, and businesses nationwide face new sales-tax collection obligations going forward.
What this does not decide
The Court decided only that a physical-presence requirement is not necessary and that South Dakota's particular law satisfies the basic nexus test. It left open whether other aspects of the law — such as retroactivity, apportionment, or burdens on small businesses — might still violate the Commerce Clause, leaving those questions for the lower court on remand.
Concurrences and dissents
Concurrence — Justice Thomas
Justice Thomas wrote separately to say he regretted joining the Quill majority in 1992 and should instead have sided with Justice White's dissent favoring overruling Bellas Hess then. He also expressed broader skepticism of the Court's entire dormant Commerce Clause doctrine, though he still joined the majority opinion.
Concurrence — Justice Gorsuch
Justice Gorsuch agreed that Bellas Hess and Quill created an unjustified tax break for out-of-state sellers and joined the Court's opinion. He wrote separately to question the legitimacy of the dormant Commerce Clause doctrine more broadly, suggesting it is in tension with the text of the Commerce Clause and raising questions he said should be resolved another day.
Dissent — Justice Roberts
“I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.”The dissent argues Congress, not the Court, should change the tax-collection rule.
The Chief Justice agreed Bellas Hess was wrongly decided but argued the Court should have left the fix to Congress, which has direct authority over interstate commerce and the ability to study the issue and craft nuanced solutions. He warned that overruling the physical-presence rule would impose heavy compliance costs on retailers, especially small businesses, given thousands of different tax jurisdictions with inconsistent rules.
How the Court got there
The legal reasoning, step by step
- The Court applies a four-part test from Complete Auto Transit v. Brady for judging whether a state tax on interstate commerce is valid, asking whether the tax reaches an activity with a substantial connection ('nexus') to the state, is fairly divided among states, doesn't discriminate against interstate business, and is tied to services the state provides.
- The Court found that requiring a business to have an actual physical presence — a store, warehouse, or employee — in a state before that state can make it collect sales tax is not a necessary part of the nexus requirement, because the Court's own due-process cases had already dropped a physical-presence requirement for very similar reasons.
- The Court concluded the physical-presence rule created an unfair, arbitrary advantage for internet-only sellers over local stores selling identical goods, since two economically identical businesses could be taxed differently based solely on whether they kept inventory in the state.
- The Court weighed stare decisis, the principle of generally sticking with prior rulings, but decided that Quill's clarity had eroded as the internet economy grew, so the reliance interests businesses might have had in the old rule were weaker than they first appeared.
- Applying the sufficient-nexus part of the Complete Auto test directly, the Court found South Dakota's law easily satisfied it, because the law only reached sellers doing a substantial amount of business in the state and the retailers here were large companies with an extensive online presence reaching South Dakota residents.
Doctrinal impact
Cases affected by this decision
Overrules Quill Corp. v. North Dakota (504 U. S. 298)
The rule that states could not require sellers without a physical presence to collect sales tax was struck down.
Overrules National Bellas Hess, Inc. v. Department of Revenue of Ill. (386 U. S. 753)
The original 1967 physical-presence rule for sales tax collection was struck down.
Reaffirms Complete Auto Transit, Inc. v. Brady (430 U. S. 274)
The Court kept using this case's four-part test for deciding whether a state tax on interstate commerce is valid.