image: Amazon

image: Amazon

Every now and then the Supreme Court takes cases that stand to directly impact the fashion industry and those within its periphery. South Dakota v. Wayfair, Inc. is one of those cases. After making its way through the lower courts, the South Dakota v. Wayfair, Inc. case found itself before the United States’ highest court, which held on Thursday that states can collect sales taxes from out-of-state online retailers on consumer purchases. The decision overruled a decades-old precedent that had protected out-of-state sellers from being required to collect such state taxes.

In plain English, the South Dakota v. Wayfair, Inc. case came about in response to a 1990’s court ruling (Quill v. North Dakota), which held that a state could only require a business with a physical presence in a specific state to collect sales taxes on a purchase in that state. In that same vein, businesses without that physical presence. 

Now, 26 years later, the game has changed. With the rise of e-commerce giants, such as Amazon (which only recently began collecting taxes after “taking advantage of its ability to dodge collecting state and local sales taxes” for years), that decision is at the center of a Supreme Court case. 

South Dakota, tired of watching hundreds of millions of dollars in e-commerce sales by state residents go untaxed, enacted a law requiring out-of-state sellers to collect taxes and pay them to South Dakota. In particular, the state law, which was enacted in 2016, requires that e-commerce businesses making at least 200 sales – or more than $100,000 from sales – of taxable goods or services in South Dakota to collect and remit a sales tax of 4.5 percent to the state. 

Now enter: Wayfair. The Boston-based home goods e-commerce business – which collects sales tax in all but five of the 50 states (even though it is not legally obligated to do so in Delaware, Montana, Oregon, and New Hampshire, which do not have state-level sales tax requirements) – filed suit against the state of South Dakota to challenge the legality/validity of its state tax law, and the case has made its way up to the Supreme Court.

The Supreme Court’s Decision

The 5-4 decision – which was written by Justice Anthony Kennedy, who was joined by Justice Ruth Bader Ginsberg, Samuel Alito, Neil Gorsuch and Clarence Thomas, with John Roberts dissenting along with liberals Stephen Breyer, Sonia Sotomayor and Elena Kagan – gives states broad authority to force online retailers to collect potentially billions of dollars’ worth of sales taxes by reviving the 2016 South Dakota law. 

“The Internet’s prevalence and power have changed the dynamics of the national economy,” Justice Kennedy wrote for the majority. He further stated that “each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states.”

The ruling – which serves to even the playing field between online retailers and brick-and-mortar businesses that have long collected state sales taxes on purchases – is expected to lead to other states to try to collect sales tax on purchases from out-of-state online businesses more aggressively, and “to cause many consumers to pay more at the online checkout,” per CNBC. 

However, these states will need to pass legislation (if they have not already done so) before seeking to collect the additional taxes. 

THE BOTTOM LINE: Internet retailers can be required to collect sales taxes in states where they have no physical presence, overruling a decades-old precedent that protected out-of-state sellers from being required to collect such taxes.