As consumers shop more and more online, they’ve often stumbled across a delightful fact: Many online purchases are tax-free. This can mean consumers save a few dollars on small purchases, and even more money on big-ticket items, making it even more difficult for physical stores to lure in buyers. It’s a boon for shoppers in the states that don’t collect sales tax for online purchases, but has severely hurt the ability of states across the country to close budget gaps.
But all of this may soon change. For a long time, online retailers did not collect sales tax on many purchases because of a 1992 Supreme Court case, Quill Corp. v. North Dakota, which prevented states from collecting sales tax from retailers that didn’t have a physical presence or employees within their borders. On Thursday, the Supreme Court overturned that ruling. In South Dakota v. Wayfair, the court ruled that the Quill decision was “flawed,” and that rejecting it “is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents.”
This doesn’t mean that websites will all of a sudden start collecting sales tax, even if they don’t have a physical presence in the state. In the Wayfair ruling, the Supreme Court was looking specifically at a law passed in South Dakota that sought to collect sales taxes on online purchases. The state of South Dakota, which was especially impacted by the Quill case because it has no personal income tax, had passed a law in 2016 requiring out-of-state sellers to collect and remit sales tax as if they had a physical presence in the state. Online retailers including Wayfair, Overstock.com, and Newegg argued that the law was unconstitutional. In its 5-4 ruling Thursday, the Court ruled that the South Dakota law is constitutional. This means that South Dakota can collect sales taxes from online retailers as it set out to do in 2016. The state’s law applies only to sellers that sell more than $100,000 worth of goods in South Dakota, or have more than 200 separate sales in the state, and is not retroactive, meaning the state can’t collect the estimated $48 to $58 million a year it’s lost in online sales taxes.