South Dakota v. Wayfair: The Supreme Court Case That Changed Online Sales Tax
Last updated: April 2026
Researched by the NexusFlag Research Team
In South Dakota v. Wayfair, Inc. (2018), the U.S. Supreme Court ruled 5-4 that states can require out-of-state sellers to collect sales tax based on economic activity alone, overturning the physical presence requirement established in Quill Corp. v. North Dakota (1992).
5-4
Supreme Court vote in favor of South Dakota
43+
States enacted economic nexus laws within 2 years
$13B
Annual tax revenue states were losing before Wayfair
What the Case Was About
South Dakota v. Wayfair started as a deliberate legal strategy by South Dakota. The state was losing roughly $48 million to $58 million per year in uncollected sales tax on online purchases. Under the existing Quill ruling from 1992, South Dakota could not force online retailers to collect sales tax unless those companies had offices, employees, or property in the state.
In 2016, South Dakota passed Senate Bill 106, setting an economic nexus threshold of $100,000 in sales or 200 transactions with South Dakota customers within a year. The law went into effect knowing it violated Quill. South Dakota immediately sent nexus notices to Wayfair, Overstock.com, and Newegg — all large online retailers with no South Dakota physical presence. The retailers refused to comply, and the state sued.
South Dakota lost at the state court level. The South Dakota Supreme Court ruled that the state could not enforce the law because it was in direct conflict with Quill. South Dakota appealed to the U.S. Supreme Court, and the Court agreed to hear the case. The question before the Court was whether Quill should stand or be overturned.
The Ruling and Why It Went 5-4
The Supreme Court issued its decision on June 21, 2018. The majority opinion was written by Justice Anthony Kennedy, joined by Justices Ginsburg, Alito, Thomas, and Gorsuch. Chief Justice Roberts dissented, joined by Justices Breyer, Sotomayor, and Kagan.
The majority held that the physical presence rule from Quill was "unsound and incorrect" in the modern era of internet commerce. The Court found that the rule created a market distortion favoring remote sellers over in-state retailers, and that South Dakota's $100,000 / 200-transaction threshold provided sufficient safeguards to prevent undue burden on small sellers.
Kennedy's majority opinion noted that online retail had grown dramatically since 1992 and that the physical presence rule was producing an "arbitrary, formalistic distinction" that was hard to justify. A seller shipping $50 million worth of goods into a state and having no collection obligation was treating the state as a tax-free zone at the expense of local businesses.
The dissent, written by Chief Justice Roberts, agreed that Quill was probably wrong but argued that overturning it was a job for Congress, not the courts. Roberts worried about retroactive liability for sellers who had relied on the physical presence rule for years. That concern turned out to be largely addressed by state transition rules, most of which applied economic nexus only prospectively.
Timeline: From 1967 to Today
1967
National Bellas Hess v. Illinois
The Supreme Court first established that mail-order sellers with no in-state physical presence could not be required to collect state sales tax. This laid the groundwork for the physical presence rule.
1992
Quill Corp. v. North Dakota
The Supreme Court reaffirmed the physical presence rule, blocking North Dakota from requiring Quill — a mail-order office supplies company with no North Dakota presence — to collect sales tax. States were frustrated but legally blocked from taxing remote sellers.
1990s–2000s
The e-commerce explosion
Amazon launched in 1995. By the early 2000s, online retail was growing at double-digit rates annually. The inability to tax online sales cost states an estimated $13 billion per year by 2017, according to the Government Accountability Office.
2016
South Dakota passes SB 106
South Dakota deliberately passed Senate Bill 106, setting economic nexus at $100,000 in revenue or 200 transactions. The state knew the law violated existing precedent and expected legal challenges — that was the point. The state wanted to force a new Supreme Court test.
June 21, 2018
South Dakota v. Wayfair decided
The Supreme Court ruled 5-4 in favor of South Dakota. Justice Anthony Kennedy wrote the majority opinion, finding that the Quill physical presence rule was wrong and created market distortions that put brick-and-mortar retailers at a disadvantage. The Court held that South Dakota's economic nexus law was constitutionally valid.
2018–2019
States rush to enact economic nexus laws
Within 18 months of the ruling, more than 40 states had enacted economic nexus laws. Most adopted thresholds similar to South Dakota's: $100,000 in revenue or 200 transactions measured on a trailing 12-month basis.
2023
Missouri — the last state
Missouri became the final state to enact an economic nexus law, effective January 1, 2023. With Missouri's law in place, all 45 states with sales tax now have economic nexus requirements for remote sellers.
What Wayfair Means for Online Sellers in 2026
The practical consequence of South Dakota v. Wayfair is that any online seller shipping goods to customers in other states must now track their sales volume in each of those states against that state's nexus threshold. Once a threshold is crossed, the seller must register with the state and begin collecting sales tax within 30 to 60 days in most states.
Before Wayfair, a business could sell nationally without any sales tax obligation outside its home state, as long as it had no out-of-state employees or facilities. That is no longer true. A DTC brand selling $2 million per year through its Shopify store is almost certainly required to collect sales tax in multiple states today.
The enforcement environment has also changed. States have become significantly more aggressive about auditing remote sellers since 2018. Several states share audit data and coordinate enforcement. The risk of being caught out of compliance has grown substantially compared to the pre-Wayfair era.
Before Wayfair (pre-2018)
- —Only owed sales tax in states where you had physical presence
- —No threshold to track — physical presence was binary
- —Online retailers had a structural tax advantage over local stores
After Wayfair (2018 onward)
- —Must track revenue and transaction counts in every state you sell to
- —45 states plus D.C. have active economic nexus laws
- —Most states use $100,000 annual revenue as the trigger
Find out where Wayfair has created obligations for your business
NexusFlag maps your sales data against all 45 state economic nexus thresholds and tells you where you need to act.
Frequently asked questions about South Dakota v. Wayfair
What did the Wayfair decision do?
South Dakota v. Wayfair (2018) overturned the physical presence requirement for sales tax collection established in Quill Corp. v. North Dakota (1992). The Supreme Court ruled 5-4 that states can require out-of-state sellers to collect and remit sales tax based on economic activity alone — revenue or transaction volume — without any physical presence in the state. This gave states the legal authority to enact economic nexus laws for the first time.
Does Wayfair affect small businesses?
The Wayfair decision directly affects any business selling products online to customers in other states, including small businesses. However, the thresholds set by most states — $100,000 in annual revenue being the most common — provide a floor below which small sellers are not required to collect. A business making $30,000 in total annual sales is unlikely to cross economic nexus thresholds in most states. The concern grows as a business scales and starts shipping meaningful volume into multiple states.
When did economic nexus start?
Economic nexus as a legal concept existed in some states before Wayfair, but it was largely unenforceable against out-of-state sellers due to the physical presence rule from Quill (1992). South Dakota v. Wayfair was decided on June 21, 2018. Most states enacted economic nexus laws within 12 to 24 months of that ruling. Missouri was the last state to adopt an economic nexus law, which took effect in 2023.
Who were the defendants in the Wayfair case?
The defendants in South Dakota v. Wayfair were three large online retailers: Wayfair, Inc. (home goods), Overstock.com, and Newegg. South Dakota deliberately chose large, recognizable retailers to bring a clean test case to challenge the physical presence rule. The defendants argued that under Quill they had no obligation to collect South Dakota sales tax because they had no physical presence in the state.
What was the Quill decision that Wayfair overturned?
Quill Corp. v. North Dakota (1992) was the Supreme Court case that established the physical presence rule for sales tax. In that case, the Court ruled that a mail-order seller with no offices, employees, or property in North Dakota could not be required to collect North Dakota sales tax. The rule stood for 26 years until South Dakota v. Wayfair overturned it. Quill itself was building on an earlier 1967 case, National Bellas Hess v. Department of Revenue of Illinois.
Is the Wayfair decision still in effect?
Yes. South Dakota v. Wayfair (2018) remains the controlling Supreme Court precedent on sales tax nexus. There have been no subsequent Supreme Court cases that have narrowed or overturned it. As of 2026, 45 states plus Washington D.C. have active economic nexus laws built on the authority granted by the Wayfair ruling.
Disclaimer: NexusFlag provides informational content about sales tax law and economic nexus — not legal or tax advice. The Wayfair ruling and state economic nexus laws continue to evolve. Consult a qualified sales tax professional or attorney for guidance specific to your business.