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SCOTUS: States Can Tax Out-Of-State Online Sales

By George Khoury, Esq. | Last updated on

The High Court just issued its opinion in one of the bigger cases this term, with far reaching implications for businesses large and small throughout the country. The issue of whether a state can collect tax from an out-of-state seller that makes a sale to an individual within the state has been decided in the state's favor.

And while SCOTUS warned that its specific decision only narrowly applies to the South Dakota law in question, commentators and the Court know that every state that collects sales tax is likely going to be looking over its tax codes after reviewing the guidance in the opinion.

Taxing the New World

As the majority opinion explained, the prior precedent on taxing out-of-state sellers was simply outdated. It was designed in a time when catalog sales made the world go round. Those times are over. As Justice Kennedy explained:

Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.

In relatively short order (at least for an opinion of this magnitude), Justice Kennedy provides the rationale for overturning the physical presence rule, which had governed out of state sales tax for decades.

Online Sellers Upset

Naturally, smaller online sellers, particularly those that operate on slim margins, are rather upset at the decision. The Court cautioned that South Dakota's law placed certain restriction that other states would be wise to mimic, such as it not applying unless a seller makes a minimum of $100K in sales in the state, or does 200 transactions.

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