Redefining Physical Presence

A number of states found a way to circumvent the Supreme Court’s 1992 ruling—they simply redefined physical presence. New York started the trend when it changed its tax laws in this manner. In New York, an online retailer that pays any party within New York to solicit business for its products is considered to have a physical presence in the state and must collect state taxes. Since then, around half of the states have made similar changes.


These laws, often called “Amazon tax” laws because they are aimed largely at Amazon.com, affect all online sellers, especially retailers that pay affiliates to direct traffic to their websites. The laws have been upheld by several courts. Direct Marketing Association v. Brohl, 814 F.3d 1129 (1oth Cir. 2016); D & H Distributing Co. v. Commissioner of Revenue, 477 Mass. 538, 79 N.E.3d 409 (2017).


The Supreme Court Changes Course

In 2018, in South Dakota v. Wayfair, Inc., ____ U.S. ____, 138 S.Ct. 2080, 201 L.Ed.2d 403 (2018), the United States Supreme Court overruled its earlier decision and opened the door to state taxation of online sales. The South Dakota legislature had enacted a statute that required certain out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state.” The law applied only to sellers that sell more than $100,000 worth of goods or services within the state per year. South Dakota then sued three large retailers, Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., for failing to collect taxes as required under this law. The lower courts and the state’s highest court ruled in favor of the retailers because of the Supreme Court’s precedent requiring physical presence.


When the case reached the Supreme Court, however, the justices reexamined the earlier decision, and five out of nine of them chose to overrule it. The majority found that the case’s focus on physical presence created an “online sales tax loophole” that gave out-of-state businesses an advantage. The justices concluded that in today’s online environment, physical presence in a taxing state is not necessary for the seller to have a substantial connection with the state.


Chief Justice John Roberts wrote the dissenting opinion. He noted, “E-Commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”


Does the Supreme Court’s decision in South Dakota v. Wayfair, Inc., make it more or less likely that Congress will enact legislation that requires out-of-state corporations to collect and pay taxes to states for online sales?