Supreme Court Closes Tax Loophole for Online Retailers

In a 5-4 decision yesterday, the Supreme Court closed a tax loophole that prohibited states from taxing certain online retailers.  In South Dakota v. Wayfair, Inc., the Court overruled its 1992 decision in Quill Corporation v. North Dakota which prohibited states from taxing retailers with no physical presence within their boundaries.  Relying on the Commerce Clause, the Court found that each year, the physical proximity rule has become “further removed from economic reality and results in significant revenue losses to the States.”

The Court had three primary reasons for overturning Quill.  First, the Court held that Quill was flawed on its own terms because the physical presence rule was not a necessary interpretation of Complete Auto’s Nexus Requirement, which requires there be a close relation between the state and the transaction it seeks to tax.  Second, the Court held that Quill created market distortions that created judicial tax shelters for businesses that limited their physical presence to one state, but then targeted consumers from other states via the Internet.  The Court noted that this was not an issue in 1992, a pre-Amazon era, when Quill was decided.  Third, the Court held that Quill imposed an “arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow in favor of ‘a sensitive, case-by-case analysis of purposes and effects,’”. This will permit courts to have more power to determine individual taxation controversies.

Large companies like Wal-Mart and Amazon, which have physical presences in 50 and 45 states, respectively, will not be impacted by this change.  Instead, small online retailers will likely feel an economic pinch from this decision.  Online Retailer eBay, which hosts many smaller retailers, warned this decision would place, “crushing burdens on small online businesses, causing many to curtail operations and damaging the national economy.”  Investors with positions in e-commerce should therefore pay close attention to their portfolios as businesses adjust to this change.