The 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc., commonly referred to as the Wayfair Decision, fundamentally transformed how sales tax is applied to online purchases. Previously, as established in the 1992 Quill Corp. v. North Dakota case, states could only demand sales tax collection from businesses with a physical presence in the state, such as a store, office, or warehouse. This meant many online-only retailers did not have to collect sales tax for customers in states where they had no physical footprint.
However, as e-commerce grew rapidly, states began losing substantial sales tax revenue, placing local businesses at a disadvantage. The Court recognized that the physical presence rule was outdated in a digital economy where companies like Wayfair could have significant economic interactions with a state without any physical establishment.
The Court’s ruling discarded the physical presence requirement and introduced the principle of “economic nexus.” Under economic nexus laws, states can require out-of-state sellers to collect and remit sales tax if their sales or the number of transactions into the state cross a specified threshold. For example, South Dakota’s law, which was central to the case, applies to sellers with over $100,000 in sales or 200 separate transactions annually within the state.
For businesses, this means that once they meet a state’s economic nexus threshold, they must register for a sales tax permit, collect the appropriate sales tax at the point of sale, and remit the collected taxes to the state. This process can be complex due to varying thresholds and tax rates across states, as well as distinctions in taxability for different products and services.
Consumers now often pay sales tax on more online purchases, aligning the tax treatment of online shopping more closely with brick-and-mortar retail. This levels the playing field for local businesses.
A typical example is a small online company based in a state with no sales tax that, after crossing sales thresholds in another state, must begin collecting and remitting that state’s sales tax. Failure to comply can result in penalties and back taxes.
The Wayfair Decision affects not only large retailers but any business meeting economic nexus criteria, increasing the importance of understanding state-specific sales tax obligations. Many businesses rely on sales tax software and automated solutions to manage compliance efficiently.
For further clarity on legal connections related to sales tax, see our glossary entry on Nexus. To understand permissions required to collect taxes, refer to Sales Tax Permit guidelines. Businesses can also benefit from knowledge about Sales Tax Software solutions designed to automate tax calculations and filing.
The Wayfair ruling is a landmark change in U.S. sales tax law, reflecting the evolving economy and ensuring fair tax collection in the era of online commerce.
Sources:
- South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). Available at: https://www.law.cornell.edu/supremecourt/text/17-494
- IRS Publication 509, “Tax Calendars” (2024). Available at https://www.irs.gov/publications/p509
- Understanding Sales Tax Obligations: ConsumerFinance.gov (https://www.consumerfinance.gov/ask-cfpb/what-is-sales-tax-en-2175/)