Brooklyn Journal of Corporate, Financial & Commercial Law

First Page



For more than a century, brick-and-mortar retailers have been losing local customers—first with the rise of mail-order houses and then more acutely with the rapid growth of online retail. As a result, states have noticed a significant loss in sales tax revenue. While an equivalent amount of tax is typically still owed to the state in the form of a use tax, which is to be remitted to the state by the customer, because these taxes are not automatically collected at the time of the sale, customers have overwhelmingly elected not to pay them. In an effort to recover this lost tax revenue, a number of states have passed legislation obligating out-of-state retailers—particularly large mail-order houses and internet retailers—to collect and remit sales taxes in the same manner as in-state businesses. Twice in the twentieth century, the Supreme Court of the United States found such legislation to be unconstitutional on either Due Process or Commerce Clause grounds, or both. From these decisions, the “physical presence rule” was born; it required that a business have qualifying property or sales force within a state before the state could compel the business to collect and remit sales taxes. In an act of desperation, South Dakota challenged the physical presence rule in 2016, and in June 2018, the Supreme Court reversed its position, abrogating the rule it had previously established and upheld. This Note argues that the Supreme Court’s decision was flawed in both its analysis and outcome and that state legislation, such as the legislation passed by South Dakota, places an unconstitutional burden on interstate commerce and may violate certain retailers’ due process rights.