When you buy goods on the internet and the seller is located in another state, should you pay tax? As a consumer, you’d like to say no. But the Supreme Court tackled this question in South Dakota v. Wayfair, Inc.

The Court had to decide if the dormant Commerce Clause prohibits states from requiring sellers with no physical presence in the state to collect and remit sales tax for goods sold within the state. In the past, in the 1992 Quill Corp. v. North Dakota, the Court ruled that states could not impose tax on businesses with no physical presence in the state.

But in 2018, the Court overturned Quill, and held that sellers who engage in a significant quantity of business within a state may be required to collect and remit taxes, despite not having a physical presence in the state.

The Court reasoned that the real issue should be whether a Seller has a “substantial nexus” to the state, and recent technological advancements and rise of the digital economy had undercut the “physical presence” rule; physical presence is by now an outdated proxy for “substantial nexus.”  The Court also reasoned that “physical presence”  rule creates market distortions, as it puts businesses with physical presence at a competitive disadvantage relative to out of state sellers.

Dissent vehemently disagreed with majority’s decision. They thought that this significant change in taxation laws should be reviewed and decided by Congress, not judges.

The Government Accountability Office estimates that state and local governments could have collected up to $13 billion more in 2017 had they been allowed to require sales tax payments from online sellers.

But for retailers, large and small, this decision means having to deal with additional complications of multiple tax regimes, and significant additional revenues for states governments. The degree of impact this decision, especially on smaller businesses, remains to be seen.