How the Internet Sales Tax Will Affect You

Internet sales tax—and the broader question of when states can require online retailers to collect and remit sales tax—has been one of the most consequential legal issues in e-commerce law. The Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), fundamentally changed the landscape by overturning the physical presence nexus requirement that had allowed online retailers to avoid collecting tax in states where they had no physical presence. Understanding the current legal framework is essential for any business selling goods or services online.

The Pre-Wayfair Landscape

For over two decades, the dominant rule governing Internet sales tax was the physical presence nexus standard established by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Under Quill, states could only require a seller to collect and remit sales tax if the seller had a physical presence—employees, offices, warehouses, or property—within the taxing state. Online retailers without in-state physical presence could sell to a state’s consumers without collecting sales tax, leaving consumers technically responsible for self-reporting and paying use tax—an obligation that the vast majority ignored.

The result was a structural disadvantage for physical retailers competing with Internet-based competitors. A consumer buying a laptop from a local electronics store paid sales tax; buying the same laptop online from a retailer without in-state presence did not. Online retail sales were projected to reach $327 billion by 2016 in the United States alone, meaning the tax advantage was not trivial—it represented billions of dollars in sales that circumvented state tax collection.

The Marketplace Fairness Act Debate

The Marketplace Fairness Act, which was proposed in several sessions of Congress, would have authorized states to require out-of-state sellers to collect sales tax regardless of physical presence, provided the states adopted simplification measures from the Streamlined Sales and Use Tax Agreement. The legislation passed the Senate in 2013 but stalled in the House, where concerns about compliance burdens on small businesses, the complexity of multi-state tax administration, and constitutional questions about congressional authority to override Quill prevented passage.

The legislative impasse continued until the Supreme Court’s intervention in Wayfair.

South Dakota v. Wayfair: The Game Changer

In Wayfair, the Supreme Court overruled Quill and upheld South Dakota’s economic nexus statute, which imposed sales tax collection obligations on any seller with more than $100,000 in annual sales or more than 200 separate transactions in the state. The Court held that the physical presence rule was an anachronism that did not reflect the economic reality of modern commerce and created market distortions that could not be justified under the dormant Commerce Clause analysis.

Justice Kennedy, writing for the majority, noted that Quill‘s physical presence rule had become “a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers, something that has become easier and more prevalent as technology has advanced.” The economic nexus standard—focusing on the volume and value of a seller’s sales into a state rather than its physical footprint—better reflected where economic activity actually occurs.

The Post-Wayfair Compliance Landscape

Following Wayfair, every state with a sales tax enacted economic nexus legislation. Most states set the threshold at $100,000 in annual sales or 200 transactions—mirroring the South Dakota statute the Court upheld. Some states have higher thresholds; some have eliminated the transaction count and rely solely on the dollar threshold; some apply lookback periods of one or two years for calculating the threshold.

For Internet retailers, this means sales tax compliance has become dramatically more complex. A business selling online to customers across the country may have economic nexus—and therefore collection and remittance obligations—in 40+ states. Each state has different rates, different product taxability rules, different filing schedules, and different administration systems. The compliance burden is significant, particularly for small and mid-size businesses.

Small Seller Exemptions and Safe Harbors

Most states provide safe harbors for sellers below the economic nexus threshold, ensuring that small businesses are not burdened with nationwide compliance obligations they cannot practically manage. The Wayfair decision itself emphasized that South Dakota’s law included protections for small sellers—the Court cited these protections as evidence that the law did not unduly burden interstate commerce.

Sellers below the threshold in any given state have no collection obligation in that state, even under the post-Wayfair economic nexus framework. Monitoring threshold calculations on a state-by-state basis is necessary to know when collection obligations trigger.

Marketplace Facilitator Rules

Most states have enacted marketplace facilitator laws that shift the collection and remittance obligation to large online marketplaces—Amazon, eBay, Etsy, Walmart Marketplace—for sales made through those platforms. This relieves third-party sellers on those platforms of collection obligations for marketplace sales, but sellers who also operate their own direct-to-consumer websites remain responsible for collecting tax on those sales.

Revision Legal’s Internet law attorneys advise e-commerce businesses on the legal and regulatory landscape affecting online commerce, including sales tax compliance, platform agreements, and multi-state legal obligations. If you have questions about how the Internet sales tax framework applies to your business, contact us for a consultation.