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U.S. Supreme Court agrees with states on collection of online sales tax

Release Date: Jun 21, 2018

TOPEKA – (June 21, 2018) – The U.S. Supreme Court today sided with Kansas and other states in overturning the “physical presence” rule that had prevented states from collecting sales tax from online retailers based outside the state, Kansas Attorney General Derek Schmidt said.

In a 5-4 decision, the high court agreed with the states that the physical presence rule, which had been established by previous court decisions in 1967 and 1992 before the advent of modern internet commerce, was flawed.

“The physical presence rule has ‘been the target of criticism over many years from many quarters,’” the majority wrote. The previous court decisions “created an inefficient ‘online sales tax loophole’ that gives out-of-state businesses an advantage. … 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.”

Schmidt, along with the attorneys general of 40 other states, two territories and the District of Columbia had filed a brief in the case in support of the State of South Dakota, whose online sales tax collection law was being challenged in the underlying case.

“The court has rightly sided with the states on this issue, allowing states to choose to collect sales tax on all goods sold, whether the item is purchased through a local retailer or through an out-of-state website,” Schmidt said. “The court-made physical-presence rule was outdated and, ultimately, incorrect. This decision will allow states the ability to level the playing field for all retailers.”

The case is State of South Dakota v. Wayfair, Inc. A copy of the court’s opinion is available at http://bit.ly/2MK290p.

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