News & Insight

Major Supreme Court Decision on Sales Tax and Internet Sales

On Thursday, June 21, 2018, the Supreme Court decided that an out-of-state seller can be required to collect sales tax in a state even if the seller doesn’t have a physical presence there. In doing so, the Court expressly overruled its own longstanding precedent. The primary practical impact of the decision is that internet sellers will generally be required to collect sales tax in all states that impose it, regardless of whether the seller has employees or facilities there.

In 1967, the Court announced the rule that states may not impose their sales tax on sellers that do not have a physical presence there. Accordingly, mail-order sellers—and, in the modern context, internet sellers—who sold goods to purchasers in states with sales tax were not required to collect the tax if they did not have employees, offices, or some other physical presence there. The mere shipment of goods into the state by mail or other delivery service was not enough to establish the required physical presence. In 1992 the Court upheld that rule and clarified that certain of its intervening decisions on the state taxing power did not negate it.

In its new decision, the Court expressly overturns its 1967 and 1992 decisions on the basis that they wrongly created the physical presence requirement out of the broader, legitimate requirement that a taxpayer have a substantial connection with a state in order to be subject to its taxing power. The effect of overturning those cases is that there is now no physical presence requirement, and the test for whether an out-of-state seller is subject to sales tax withholding—under the broader, legitimate test—is whether by making sales in the state the seller enjoyed the privilege of doing business in the state. In the case at issue, the Court found that the sellers’ large volume of sales in the state—by dollar amount and number of transactions—was easily sufficient to satisfy the test and the seller was required to collect the state’s sales tax.

Even before this decision, states had been enacting laws or interpreting existing laws in attempts to require out-of-state sellers to collect sales taxes even if they did not have a physical presence there. Those attempts had always been questionable in light of the Court’s physical presence test. Now it is clear that sellers will be required to comply with those laws unless they are found invalid for some other reason.

If you have any questions about the impact of this decision on your business, please do not hesitate to contact our tax partner, Jeremy Garner at (410) 583-2400 or via email at