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SCOTUS upholds power of states to force internet retailers to collect sales tax

SCOTUS upholds power of states to force internet retailers to collect sales tax

The taxman cometh – States can force online retailers to collect sales tax for them.

The Supreme Court in a 5-4 ruling that did not split on traditional ideological lines, upheld South Dakota’s ability to require that out-of-state internet sellers collect state sales tax on goods sold into South Dakota. The case involved the internet retailer Wayfair and South Dakota.

The case is being misrepresented in many media reports as involving whether states can tax internet sales. They can, and that was not in issue. The issue was whether states can force internet retailers to collect the sales tax and turn those proceeds over to the state.

The Court overruled prior holdings that required a physical presence, ruling that such a physical requirement rule was developed prior to the internet as we know it today. the Kennedy opinion is joined by Thomas, Alito, Ginsburg, and Gorsuch. Thomas and Gorsuch have concurring opinions. Roberts dissented, joined by Breyer, Sotomayor, and Kagan.

I don’t have a lot of time to analyze this, since I’m at a conference all day, so here’s a quick excerpt of the Opinion:

JUSTICE KENNEDY delivered the opinion of the Court.

When a consumer purchases goods or services, the consumer’s State often imposes a sales tax. This case
requires the Court to determine when an out-of-state seller can be required to collect and remit that tax. All concede that taxing the sales in question here is lawful. The question is whether the out-of-state seller can be held responsible for its payment, and this turns on a proper interpretation of the Commerce Clause, U. S. Const., Art. I, §8, cl. 3.


Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.


All agree that South Dakota has the authority to tax these transactions. S. B. 106 applies to sales of “tangible personal property, products transferred electronically, or services for delivery into South Dakota.” §1 (emphasis added)…. The central dispute is whether South Dakota may require remote sellers to collect and remit the tax without some additional connection to the State….


The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders. Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents. This Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State….


Between targeted advertising and instant access to most consumers via any internet-enabled device, “a business may be present in a State in a meaningful way without” that presence “being physical in the traditional sense of the term.” Id., at ___ (slip op., at 3). A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores. Yet the continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State….


For these reasons, the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions in Quill Corp. v. North Dakota, 504 U. S. 298 (1992), and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), should be, and now are, overruled.

The Dissent by Roberts argued that this should be an issue for Congress, not the courts:

I agree that Bellas Hess was wrongly decided, for many of the reasons given by the Court. The Court argues in favor of overturning that decision because the “Internet’s prevalence and power have changed the dynamics of the national economy.” Ante, at 18. But that is the very reason I oppose discarding the physical-presence rule. Ecommerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago….


This is neither the first, nor the second, but the third time this Court has been asked whether a State may obligate sellers with no physical presence within its borders to collect tax on sales to residents. Whatever salience the adage “third time’s a charm” has in daily life, it is a poor guide to Supreme Court decisionmaking….

Congress has in fact been considering whether to alter the rule established in Bellas Hess for some time…. Nothing in today’s decision precludes Congress from continuing to seek a legislative solution. But by suddenly changing the ground rules, the Court may have waylaid Congress’s consideration of the issue. Armed with today’s decision, state officials can be expected to redirect their attention from working with Congress on a national solution, to securing new tax revenue from remote retailers. See, e.g., Brief for Sen. Ted Cruz et al. as Amici Curiae 10–11 (“Overturning Quill would undo much of Congress’
work to find a workable national compromise under the Commerce Clause.”)….


The Court’s focus on unfairness and injustice does not appear to embrace consideration of that current public policy concern. The Court, for example, breezily disregards the costs that its decision will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. Over 10,000 jurisdictions levy sales taxes, each with “different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence” in the jurisdiction….


The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even “micro” businesses to potential buyers across the Nation….

A good reason to leave these matters to Congress is that legislators may more directly consider the competing interests at stake. Unlike this Court, Congress has the flexibility to address these questions in a wide variety of ways…. Congress can focus directly on current policy concerns rather than past legal mistakes. Congress can also provide a nuanced answer to the troubling…. I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.

So now the ball in in Congress’ court. Nothing in the majority opinion would prohibit congressional action.

Full decision here:

South Dakota v. Wayfair, Inc., Et Al. by Legal Insurrection on Scribd


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UnCivilServant | June 21, 2018 at 10:50 am

[Expletive Deleted].

eCommerce is nothing more than an advancement of the traditional mail-order catalog. The better response would be to adjudicate that sales taxes are restraints on interstate commerce, and thus outside the tax authority of the states, as that was explicitly enumerated for the federal level.

    rdmdawg in reply to UnCivilServant. | June 21, 2018 at 12:22 pm

    Not to mention, how on earth is this ruling enforceable?

      SDN in reply to rdmdawg. | June 21, 2018 at 12:57 pm

      That, unfortunately, is pretty simple:

      State government: We know you sold and shipped some quantity of goods into our state last year, and you have the shipping address it went to. Cough up the money or we’ll file for “failure to pay taxes owed” and get the info in discovery.

      bw222 in reply to rdmdawg. | June 21, 2018 at 3:17 pm

      My company is in the incentive awards business. We have one location – Ohio. We have been paying state and local sales taxes for years. It isn’t that difficult with today’s software.

        BobM in reply to bw222. | June 21, 2018 at 4:35 pm

        Which software do you use to track your internet sales and automatically pay the 10,000 different sales-taxing authorities the correct amount, automatically file the required quarterly reports (once you have made a single sale within the past X years), and all the other foderall that will now be required?

        Each state may (or may not invoke a sales tax, for different rates and possibly at different rates depending upon the TYPE of gods sold.
        Each County the same. heck, each CITY the same.

        I call shenanigans, get out the brooms and pitchforks.

        Amazon may have the ability to track these requirements, is probably dancing in the cubical aisles at the twin prospects of charging businesses to do this for them, AND the other main effect of the “Kill Small Internet Businesses Decision”.

    Albigensian in reply to UnCivilServant. | June 22, 2018 at 5:57 pm

    Since the Court has done away with the “physical presence” requirement, the resolution here may be that out-of-state mail-order merchants may be treated no differently than internet merchants, and also required to collect sales taxes?

Since it was determined that Quill is outdated the conclusion seems to be that Supreme Court rulings shouldn’t be taken too seriously, because in the era of a living breathing Constitution you never know which way the wind might blow!

my problem with it, is that the states might try to place additional sales taxes on Internet sales. e.g. normal sales tax 8% Internet sales tax 10%

    Aarradin in reply to ronk. | June 22, 2018 at 5:15 am

    My understanding is that this is covered under other SCOTUS rulings, not overturned by this one.

    States are not allowed to discriminate against out of state vendors as you describe.

All state sales tax statutes have as part and parcel another component, called the use tax, which requires the residents of that state to pay the sales tax, through self-declaration, on purchases made in another state and brought into the resident state. But because the requirement of self-declaration is easily avoided, and because policing of stuff brought into the resident state so difficult, states reason, “Lets get the point of sale wherever it is on every sale.” It’s a simple as that.

Whenever Congress or my state legislature passes a law, or when a court interprets the federal or state constitution or a statute I ask, “Do I have more freedom because of this, or less?”

Well, what of Wayfair?

    DaveGinOly in reply to pfg. | June 21, 2018 at 8:49 pm

    Use taxes are unconstitutional.

    You buy a car in your home state and pay the sales tax.
    I live in the same state and buy a car in a neighboring state, bring it home, and pay the use tax.

    Why is this unfair/unconstitutional?

    Sales taxes are on the privilege of making a sale at retail (in a way, it’s a penalty for defrauding the public into paying more for an item than it’s worth). It is not a tax on the acquisition of the property by the buyer. (Citizens have a right to acquire property, conduct not the proper subject of a tax.)

    Sales taxes present the appearance of being owed and paid for by the buyer, but in fact the retailer is liable for the tax. The retailer has the advantage of being able to transfer the burden (but not the liability) of the tax onto the buyer, by making the payment of an amount equal to the sales tax (above the price of the goods or services) a condition of the sale. (Retailers are not “unpaid tax collectors for the state” as they often complain. If the retailer does not impose the burden of the tax on the buyer at the point of sale, the retailer would still owe the tax, but now it would come out of his gross, reducing – possibly eliminating – his profit. The retailer does himself a favor by imposing the burden of the tax onto the buyer.)

    OTOH, when I buy the out-of-state car and am forced to pay the use tax, I’m being made liable for a tax on the enjoyment of my property that for which the in-state purchaser isn’t likewise liable. When you by a car in-state and I buy a car out-of-state, I am made liable for a tax for which you are not made liable, even though you purchased the same type of property and we both enjoy the same use and enjoyment through our property. This is inequality under the law, and unconstitutional. There are two ways to eliminate this inequality – abolish the use tax on out-of-state purchases or impose the use tax on in-state purchases (the latter would probably have to come with relief from the tax on the retailer for purchases like automobiles, in order to not drive buyers out of state).

Ok, the court has acknowledged that it can overturn precedent. Now let’s get busy on Roe v. Wade.

The link is to the wrong opinion. The correct one is here:

The big point: “Over 10,000 jurisdictions levy sales taxes, each with “different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence” in the jurisdiction…”

Speaking for somebody in *one* jurisdiction, the complexities of just what gets charged what for sales tax is already nearly impossible to pick out. Add 9,999 other, more complicated jurisdictions, and one must wonder if these judges have ever met a payroll or filed a sales tax return.

    Sanddog in reply to georgfelis. | June 21, 2018 at 12:52 pm

    one must wonder if these judges have ever met a payroll or filed a sales tax return.

    No, of course they haven’t. Stupid decisions made by clueless people seems to be a hallmark of American jurisprudence.

    As usual, an Amazon or a Wal-Mart will have the computer resources to make this easy. A smaller company won’t.

      DaveGinOly in reply to SDN. | June 21, 2018 at 9:05 pm

      Somebody will make a mint (probably Amazon or Google) by developing a service into which retailers can connect their online checkout systems that will automatically apply the correct local sales taxes depending on the delivery or billing address. (Which leads to another good question – will the tax be based on the delivery address or the billing address? Remember the buyer doesn’t necessary live, or plan to use, his acquired property at either location!)

That poor electronic specialist/programmer working out of his garage can no longer conduct business. He’s too small to worry about and the states wont’t just increase taxes on their own residents; they’ve got to put all these small operators out of business.

America, home of the free…

“The central dispute is whether South Dakota may require remote sellers to collect and remit the tax without some additional connection to the State….”

Ok. Fine. Can that now be extrapolated to the thousands of other taxing authorities in this nation (cities, towns & counties) who will demand their cut of the sales tax pie??

The law of unintended consequences cometh…

    Actually, the courts are requiring everybody who might do business online with residents in all of these states to be fully cognizant of all taxing regulations in all of those states; no matter how often they may change.

I find the lack of burden on business galling. Big businesses will be fine. This just likely turned a LOT of Ebay sellers and small shop e-tailers and their customers into tax cheats… And I also fear dual tax rates… one for local stores and one for online. Nice hot mess.

    healthguyfsu in reply to RobM. | June 21, 2018 at 1:45 pm

    Well, to be clear, it turned them into culpable tax cheats. This decision did not add a tax law; it simply affected the ability to enforce it.

    I’m not happy about it, either, though.

    However, some eBay sellers are private, and I believe those peer to peer sales will not be taxable.

      DaveGinOly in reply to healthguyfsu. | June 21, 2018 at 9:09 pm

      State sales taxes are on the privilege of making a sale at retail (that is, marking up an article to which no value has been added by the seller, and selling the article for more than it is worth). Sales of private property fall under the right to private property – the owner has a right to the possession, use, and enjoyment, of the property, as well as the right to lawfully dispose of, sell, or otherwise transfer the property without state interference. (Now there’s a thought to apply to private firearms sales in “universal background check” states!)

    Aarradin in reply to RobM. | June 22, 2018 at 5:19 am

    Seems like a business opportunity to me.

    There will be companies that specialize in keeping up with all those 10,000 tax districts requirements, and if you’re a small business selling over the internet then you can (for a small fee) subscribe to their service and their product will figure out how much tax is owed.

    And, of course, your slight added expense will simply get passed on to your customers.

Anyone who has a small internet business will understand that this ruling may put them out of business.

The reason isn’t necessarily collecting the sales taxes, it’s the massive administrative burden required to transfer the money to the states. In most cases, it takes hours (and hours and hours) to log on, find the right place on a state website, open an account and find a way to get that $1.23 to the state in question. Many states then require you to file quarterly, forever, whether you’re collecting anything that quarter or not.

Of course, Amazon will offer you a “we’ll pay your tax for you” service for $49 a month, but that may be more than my profit. This is a bad decision by out-of-touch elites who have no clue how hard it is to deal with government. Bah!

    casualobserver in reply to Chicklet. | June 21, 2018 at 2:12 pm

    Interesting. I never thought about the administrative impact on a business with low sales or very small margins.

    To someone who doesn’t sell in cyberspace, my question is why wouldn’t you simply collect the tax during the sale, and tag that collection in your database? Seems like you would only need to query by state name to pull up records for each.

casualobserver | June 21, 2018 at 2:09 pm

Saying the ball is in Congress’ court is equivalent to saying it is buried deep into the earth, never to be addressed again.

    Aarradin in reply to casualobserver. | June 22, 2018 at 5:22 am

    Constitution gives Congress authority to regulate interstate trade.

    That’s THEIR option.

    Ball belongs in their court.

    This ruling overturn’s previous decisions which, bizarrely, upheld the theory that Court’s that do NOT have authority to regulate interstate trade can, and should, do so and that their “rulings” (pure judicial inventions with no basis in law) ought to remain in place unless Congress can agree to pass a law to the contrary and get the President to sign it.

    That had the Constitution turned on its head. The current ruling fixes that.

    On the law, this ruling is quite correct.

    The policy considerations are debatable, of course, and the legislature is the proper place to debate policy issues and to decide what actions to take on them – or to decide NOT to take any action at all.

OleDirtyBarrister | June 21, 2018 at 2:23 pm

The doctrine of territoriality and the resulting, necessary inquiry into physical presence are old and long established precepts in the law. At the very bottom of the issue, they underlie a court’s power of personal, in rem, and quasi in rem jurisdiction. If someone or something is physically present within a state of its own accord and process can be served, under the federal constn. a state court or federal district court can exercise jurisdiction over it. See Burnham v. Superior Court The question then is then whether the state constn or jurisdictional statutes are more demanding. If someone or something is in and out of a state and served with process outside the state under the long arm statute, then the question of PJ is more complex.

There is going to be a PJ issue that accompanies this decision. If a state has the power to force an out of state seller like Wayfair to collect and remit taxes for good or services shipped across territorial boundaries into the state, does it automatically follow that the pursuing state’s courts have jurisdiction over a tax obligor like Wayfair to collect the taxes?

Are the analyses under Asahi Metal, International Shoe, Burger King, etc. truncated now in a sales tax collection enforcement case?

How does one square the power to force tax collection and remittance with recent, more stringent PJ rulings such as those in Bristol-Myers Squib Co. v. Superior Court BNSF Railway v. Tyrrell? Will it be easy to mesh the state’s substantive power to compel to tax with the power of the state’s courts to exercise personal jurisdiction over companies that make sales into the state across boundaries?

    DaveGinOly in reply to OleDirtyBarrister. | June 21, 2018 at 9:40 pm

    This may, or may not, alter some of your thoughts:
    Retailers are not involved in tax collection. Sales taxes are upon the privilege of making a sale at retail and retailers are liable for the tax. They don’t collect a tax owed by someone else (e.g., the buyer) and then forward the funds to the state. Retailers impose the burden of the tax upon the buyer at the point of sale, payment of which is a condition of the sale, but they cannot and do not transfer the liability for the tax to the buyer.

    Because of the above, any consideration of the legality of a state forcing a retailer in another state to “collect” the tax is off point. They (the retailers) are not “collecting” a tax, and they are liable for the tax whether or not they transfer the burden to the buyer. (Obviously, it’s good practice to do so. Otherwise the tax payment, i.e. the payment to the state, will come out of the retailer’s gross, and will reduce and possibly eliminate his actual profit.)

    Retailers are not “unpaid tax collectors for the state” as they so often complain.

It’s not much of a leap from this ruling to SCOTUS enabling states to tax income earned by sellers who sold goods into their state but who have no physical presence there. This would crush a small seller, the cost of doing all those extra business income tax returns would likely exceed their total business profit.

Many commenters don’t understand the problem. The issue is not really figuring out what the tax amount needs to be, or charging the customer. Every jurisdiction requires you to get a business license if you want to sell stuff in that jurisdiction. Each state is one jurisdiction and each city or town another. To get a license, you need to apply and get approved, and possibly pay an annual license fee. Then, you minister file a report with each one on whatever schedule they demand. Here in AZ, both the city and state require monthly filing whether or not you have bought or sold anything taxable. Then, any jurisdiction may audit you at any time.

Multiply this by 10000, and how can a small business sell anything? Small business would need to sell to an intermediary that would handle all this for lots of merchants in exchange for a big cut off the top. This sounds really close to Amazon Marketplace’s business model, they just need to add the extra charge for that service since now you’ll have no way to avoid selling through them.

    OleDirtyBarrister in reply to james h. | June 21, 2018 at 6:49 pm

    This post is erroneous. The decision pertains to states and their power to tax, not the power of local govt to require one to get a business license.

    A seller not physically present in a local jurisdiction was not required to have biz license yesterday or today. That is true for entities that have physical structures elsewhere and intermess sellers.

    What they might need to do is register with the state taxing authority/dept of revenue ad get a certificate or registration number.

      If the authority to collect sales taxes on out-of-state non-citizen retailers was found somewhere in the constitution, what other state authorities that affect non-citizens can be found.

      DaveGinOly in reply to OleDirtyBarrister. | June 21, 2018 at 10:01 pm

      Taxation and licensing go hand-in-hand. The license extends a privilege, the tax extracts payment for its exercise. No privilege exercised, no tax. (Payment for the license itself is often considered a “processing fee” to cover the state’s administrative costs of keeping track of everyone who has a license to exercise a state-extended privilege. Taxes are then charged upon the actual exercise of the privilege in order to raise revenue for general use by state.)

      So I think james h has a point. There can be a nexus between the state and the retailer if: 1.) the seller has a physical location within the state (and then would be required to have a license) or; 2.) if the out-of-state retailer had voluntarily exercised a state-extended privilege (i.e. acquired a license from a state in which he had no physical presence). In most of the situations we might be considering, neither of these conditions have been met, and the argument could be made that in these situations the retailer is engaged in interstate commerce, which is within the exclusive legislative jurisdiction of Congress. (Such “exclusivity” excludes the states from exercising their jurisdiction over the activity for any purpose except as remarked in the Constitution.)

Latus Dextro | June 21, 2018 at 5:51 pm

Ecommerce has flourished precisely because it is usually cheaper, free from physical overheads and able to avoid a growing constellation of local and regional taxes that have increasingly weighed on businesses, thwarting prosperity and profitability in the name of the welfare state. What of the principle of no taxation without representation? Why should companies or individuals pay taxes in jurisdictions in which they do not reside and cannot enjoy the putative benefit? Yet another reason among the litany why the globalist ideology fails.

They always screw the little guy.

If the States can enforce collection of sales tax from outside their borders, why can they not enforce their use tax laws within their borders instead?

They’ve just changed ‘point of sale’ sales tax collection to ‘end user domicile’ sales tax collection. That IS a big deal, and software isn’t going to fix the differences among the application of sales tax in the different States, regarding what items attract a sales tax and what items don’t attract a sales tax.

With that in mind, an out-of-state retailer is going to look up the sales tax rate applicable to the zip code and charge it. Which means that the retailer will be charging tax on items that do actually attract sales tax. That is, residents in the State are going to pay more in sales tax than they should. Is the State going to audit for that, and issue refunds?

    ss396 in reply to ss396. | June 22, 2018 at 9:26 am

    Texas has “sales tax holidays” during the weekend before school starts. No sales taxes are due on school supplies and clothing during these tax holidays. If I order school supplies from an out-of-state retailer during the tax holiday, that retailer will not know about the holiday and is going to charge me sales tax. I will be “harmed” by this.

    I suppose if I had the bucks and the time I could push this to the Supreme Court. But I’m too little. “Get back in line, peasant.”