South Dakota then filed a lawsuit to declare that the new law was valid, a suit that eventually found its way to the Supreme Court.
In 1992, during the era of mail-order catalogs, the Supreme Court ruled it was unconstitutional for states to demand that out-of-state sellers collect and remit sales taxes on all purchases.
The U.S. Supreme Court today handed down its anticipated decision in South Dakota v. Wayfair.
Kevin Lyons, spokesman for Texas Comptroller Glenn Hegar, said, "We welcome the court's ruling in this case and are now assessing any potential revenue impacts as a result of this decision as well as whether any rule changes or legislation might be required to achieve the benefits of the decision".
The top court in the USA has ruled that states can force online companies to collect sales tax from their customers.
The decision is a big win for major corporations such as Apple and Walmart, who generally pay sales tax due to their "physical presence" in most states throughout the country. The law required out-of-state sellers who do more than $100,000 of business in the state or more than 200 transactions annually with state residents to collect sales tax and turn it over to the state.
A Government Accountability Office audit said states missed out on about $13.7 billion in tax revenue in 2017.
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It ruled that the provision amounted to a "judicially created tax shelter" that put some companies at an advantage.
"I feel bad for the New Hampshire-based retailers because they don't have the infrastructure in place to collect sales taxes", said Nancy Kyle, president and CEO of the New Hampshire Retail Association, a 900-member organization that didn't take a position on the tax.
Conservative Chief Justice John G. Roberts Jr. led the dissent, joined by three Democratic-appointed justices. Some Marketplace sellers have contracted with Amazon to collect sales taxes for them.
The ruling comes against a backdrop of Trump's criticism of Amazon, the leading player in online retail, on the issue of taxes and other matters.Amazon, which was not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not typically collect taxes for merchandise sold on its platform by third-party venders, representing about half of total sales.
In response to the ruling, the stocks of several internet retailers, including Amazon, eBay and Wayfair, all dropped. "State taxes fund the police and fire departments that protect the homes containing their customers' furniture and ensure goods are safely delivered; maintain the public roads and municipal services that allow communication with and access to customers".
Internet companies opposed to the South Dakota law appealed.