Tax Alert

South Dakota v. Wayfair

June 25, 2018

On June 21, 2018, the United States Supreme Court handed down its long-awaited decision in South Dakota v. Wayfair, sweeping aside more than fifty years of Supreme Court jurisprudence in a 5-4 decision that will ultimately subject internet retailers to sales taxes in states where they have no physical presence.

The Decision

The Court’s decision in Wayfair overturns two previous Supreme Court precedents based on the Dormant Commerce Clause, National Bellas Hess v. Illinois (1967) and Quill Corporation v. North Dakota (1992), which effectively prevented a state from charging and collecting sales taxes from retail purchases made online and shipped to customers in the state unless the seller had a physical presence in that state.

In 2016, the South Dakota legislature passed a law that allowed it to collect sales taxes on out-of-state online retailers, and was ostensibly designed to prevent discrimination against interstate commerce by applying a safe harbor to those businesses who transact limited business in South Dakota. Specifically, the South Dakota law applies only to sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state.

The majority opinion, authored by Justice Anthony Kennedy and joined by Justices Ruth Bader Ginsburg, Clarence Thomas, Samuel Alito, and Neil Gorsuch, agreed with South Dakota’s contention that it was losing millions of dollars per year in tax revenues, and justified their decision partly on the basis that, as online commerce has grown, the physical presence requirements of the Bellas Hess and Quill precedents unfairly punish companies who are based within a state when compared to those situated elsewhere, creating an uneven tax environment.

The dissenting opinion, authored by Chief Justice John Roberts and joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan, acknowledged the majority’s contention that online commerce post-Quill has grown to form a significant and vibrant part of the national economy; however, the dissent departs from the majority’s conclusion, arguing instead that Congress, and not the Court, should act with regard to this important question of current economic policy.

Business Impact

The potential impact to online retailers cannot be overstated. The Court concluded that substantial nexus with the taxing state in Wayfair was clearly established based on both the economic and virtual contacts the respondents have with South Dakota. Where the majority opinion largely dismisses concerns that complex state and local tax compliance might pose a burden on small businesses, the dissenting opinion recognizes that there are more than 10,000 state and local tax jurisdictions throughout the United States each with varying exceptions, exclusions, and nuances that will undoubtedly raise the cost of compliance for small online retailers, most of which tend to have razor-thin profit margins.

Practically speaking, businesses that operate with an online presence and ship to states where they have no physical presence are now at risk for sales tax compliance. While certain states have imposed requirements on individuals and businesses to remit use tax for online purchases that included no sales tax component, compliance has historically fallen by the wayside. The decision in Wayfair makes tax enforcement significantly easier for the states. After all, it is much easier and efficient for a state to pursue sales tax collections from a relatively small pool of retailers as opposed to trying to collect relatively small amounts from individual taxpayers. Online retailers will need to work with their advisors to identify states in which they may have a sales tax obligation, and should take steps to acquire and implement technology services to track, calculate, and collect appropriate state, county, and locality sales taxes, as applicable.

Companies engaged in M&A activity will need to be alert to sales and use compliance by prospective targets, and adjust their state and local tax due diligence procedures accordingly. Potential buyers contemplating an M&A transaction should consider additional protections and special indemnities in the purchase agreement and evaluate the risk that noncompliance may pose to valuation and escrow determinations.  Potential sellers, on the other hand, may want to review any potential adverse impacts prior to engaging in discussions with potential buyers. 

State Impact

The Court specifically observed that South Dakota’s law, and its tax laws generally, minimizes the burden on interstate commerce. While a victory for South Dakota and states everywhere, the decision is by no means a blank check authorization for states to engage in aggressive taxation. 31 states currently have laws that tax internet sales, and while it is unclear whether the Court’s decision in Wayfair means that other states will revise their laws to comply with the limits, it stands to reason that few jurisdictions will willingly forego new revenue sources from out-of-state online retailers.


While the Court’s decision in Wayfair constitutes a sea change in tax jurisprudence, ultimate authority still rests with the Congress who could conceivably fix the problem through the legislative process. Nevertheless, the importance of the Court’s decision in Wayfair cannot be understated. If you have questions about how the Wayfair decision could affect your business or current and future transactions, please contact Joe Hunt to learn more about the implementation of this new ruling.

This Tax Alert provides general information only. It is not intended to provide advice with respect to any specific set of facts, nor is it intended to advise on all developments in the law.

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