SCOTUS Rules in Favor of Online Tax — What’s Next for Businesses?

The Supreme Court of the United States (SCOTUS) agreed to allow states to impose a tax on online transactions in the recent case South Dakota v. Wayfair.

Why is the ruling important? In order to move forward with this change, SCOTUS had to overturn two previous decisions, one in 1967 and one in 1992. These rulings led to a required physical presence rule in order for a state to tax businesses. If a business did not have a physical presence in a state, the state could not tax the business.

This is no longer the case.

In South Dakota v. Wayfair, the state successfully argued for a change. Ultimately, Justice Anthony Kennedy was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch in stating the physical presence rule was wrong from the beginning and that the “internet revolution has made its earlier error all the more egregious and harmful.”

Can states start taxing businesses at any time? In short, no. States still need to meet certain requirements before they can tax a business. Most notably, the court pointed out that states should avoid “excessive compliance burdens on out-of-state sellers.” Anything viewed as excessive could face a challenge in court.

What will happen next? States will likely begin imposing taxes on these transactions. Unless Congress acts to set rules on how states impose such a tax, it is very likely a business will take the state to court based on a tax dispute over what is and is not an excessive compliance burden will result.

Tags: Blog, IRS