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.
Quill overruled in Wayfair. Get ready to pay more sales tax when you buy stuff online pic.twitter.com/gTr0uaq5vG
— Dan Epps (@danepps) June 21, 2018
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.
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