Justice Anthony M. Kennedy wrote the majority opinion and was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel A. Alito Jr. and Neil M. Gorsuch.
The decision has major implications for online retailers, including Amazon.
The Supreme Court said the physical presence rule was "unsound and incorrect". This decision overturned a 1992 ruling, which allowed these platforms to use the internet as a tax-free haven.
In the digital era, the costs of complying with different tax regimes "are largely unrelated to whether a company happens to have a physical presence in a state", Kennedy wrote. They said local tax laws vary widely across the nation and calculating sales taxes for 10,000 local taxing jurisdictions remains a daunting task.
After states and traditional retailers have grumbled about this situation for years, South Dakota finally chose to do something to change it.
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South Dakota is leading the legal charge, passing a law requiring the collection of sales tax on Internet vendors with at least 200 yearly transactions or $100,000 in sales to its residents. Lawmakers in the state, which has no income tax, passed a law created to directly challenge the supreme court's 1992 decision.
Shares of online retailers fell sharply following the ruling, with Wayfair down 3.8 percent, Overstock off 2.1 percent and Etsy Inc shares off 4.4 percent.
Amazon, by far the nation's largest online seller, is not a party to the case, since it now has a physical presence in many states, with warehouses, and pays the taxes. The state conceded in court, however, that it could only win by persuading the supreme court to do away with its physical presence rule.
On June 4, the last day of the special second session, Louisiana legislators rushed through a bill that used the same wording as a South Dakota law that was the subject to the constitutional challenge in the high court.