The US Supreme Court has delivered its verdict in the case of South Dakota v. Wayfair Inc et al this week, in a move which could drastically change the nature of online retail in the United States. The ruling, which overturned the 1992 decision of Quill Corp v. North Dakota, has substantially freed state and local tax authorities to force the collection of sales tax upon online and out-of-state retailers.

Forty-five out of 50 states impose a form of sales tax, which requires a business to collect from customers and remit a certain amount of tax on sales transactions. Historically, the ability of the states to impose this form of tax has been limited. Notably, the 1992 Quill ruling stipulated that states could only impose a sales tax requirement on businesses which met a certain minimum level of “physical presence” within that state. This meant that an “out of state” seller could sell to customers across state lines without being subject to onerous regulation and registration requirements in each state where sales are concluded. Not having to impose a sales tax upon customers also conferred a competitive pricing advantage to such businesses.

Increasingly, this ruling had been putting pressure on state and local governments in the quest to raise revenue. The rise in digital retail and remote technologies has made it easier than ever to transact business over great distances without a physical presence, meaning that a business in New York could sell into Texas with only a simple website and off-the-shelf e-commerce software, and in doing so, avoid having to collect Texas sales tax (which, according to the Texas comptroller’s office, could be over $1 billion a year). As brick and mortar retailers continue to cede market share to their online rivals, states have been probing the boundaries of this ruling to try and claw back some of that tax base.

In Wayfair’s landmark ruling, the Supreme Court voted 5-4 to overturn Quill, and lifted the blanket restriction on imposing sales tax upon businesses with no physical presence. This decision potentially paves the way for a new era of aggressive state and local taxation upon out-of-state businesses. With the online retail space currently estimated to be valued around $400 billion in the US alone, the ramifications could be significant.

Critics argue that the additional regulatory burden with have a dampening effect on small business growth, and it is likely that the additional expense will be passed on to the consumer, leading to a broad rise in prices. Meanwhile, proponents will say that this was a necessary response to the changing nature of retail sales, and that this decision will allow for a more even playing field between local business and their larger multi-state and multi-national competitors.

But while Quill’s physical presence requirement may be gone, the Supreme Court stopped short of granting the states an unlimited remit to impose sales tax. In the majority opinion, Justice Kennedy cited the importance of specific features of the South Dakota tax system that prevent “discrimination or undue burdens” on interstate commerce, including a safe harbour exception and an explicit lack of retroactive application. The suggestion is that while South Dakota’s law may have been affirmed, more overreaching laws may not be.

The overall economic impact is uncertain, and the change is likely to be gradual. States will need to enact legislation in response to the new precedent, while the dissenting Justices argued that the onus should be on Congress to come up with a Federal solution. This process could take months and potentially be open to additional legal challenge. All eyes will be on Congress and the states to see how they react, but for now, businesses will need to proceed with the understanding that cross-jurisdictional business just became a little bit more complicated.

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