The US Supreme Court held [opinion, PDF] in South Dakota v. Wayfair [docket; SCOTUSblog materials] Thursday that the Commerce Clause of the Constitution does not prohibit states from collecting taxes from out-of-state retailers that have no physical presence within the state.

Thursday’s decision overturns two precedential cases, National Bellas Hess, Inc. v. Department of Revenue of Illinois [text] and Quill Corp. v. North Dakota [text]. Since 1992, the Quill ruling had protected online retailers from paying taxes in states in which they do not maintain a physical presence. The court called these rulings unsound and incorrect.

In 2016, South Dakota enacted a law that requires out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state” and on an annual basis, deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions for the delivery of goods or services into the State. South Dakota filed a declaratory judgment action in state court against the respondents, three online retailers—Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc.—that easily met the Act’s requirements seeking a requirement that respondents collect and remit sales tax within the state. The retailers argued that the Act was unconstitutional.

In oral arguments [JURIST report], South Dakota argued that Quill brought upon two significant consequences: the loss of large-scale sales tax revenues, and harming of small, local businesses because out-of-state remote sellers are given a price advantage. Counsel for the retailers responded that if Congress saw an issue with the Quill tax scheme in the internet era, it would have acted accordingly.

The court said that “Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow,” and remanded the issue for a ruling regarding the South Dakota law consistent with Thursday’s opinion.