Five Supreme Court Justices decided to clean up some past mistakes on Thursday, and the rest of us are going to pay for it. That’s the big consequence from a ruling that liberates state and local politicians to tax the internet nationwide with abandon.
In South Dakota v. Wayfair, a 5-4 majority tossed out the Court’s 50-year “physical-presence” standard that limited states from collecting sales tax from out-of-state retailers. The ruling overturns its Bellas Hess (1967) and Quill (1992) precedents that said states can’t force remote retailers to remit sales taxes.
States have chafed that this “physical-nexus” standard limits their sovereign powers and erodes their tax base amid the growth of internet commerce. Justice
in particular has seemed eager to atone for what he thought was a mistake for signing onto Quill, and Justices
Ruth Bader Ginsburg
went along for the Commerce Clause history lesson.
Justice Kennedy writes for the majority that the “physical presence rule is a poor proxy for the compliance costs faced by companies that do business in multiple States” and that “other aspects” of Commerce Clause jurisprudence can “better and more accurately address any potential burdens on interstate commerce.”
The majority has a point that the physical-presence standard is arbitrary, and states have been testing its limits. Massachusetts has proposed defining physical presence to include apps available for download by in-state residents and placing cookies on residents’ browsers. “What may have seemed like a ‘clear,’ ‘bright-line tes[t]’ when Quill was written now threatens to compound the arbitrary consequences that should have been apparent from the outset,” Justice Kennedy asserts.
Perhaps, but as Chief Justice John Roberts notes in his persuasive dissent, there’s no crisis that now compels the Court to expiate a long-ago mistake that Congress has the power to fix. Between 87% and 96% of sales from the top 100 Internet retailers are taxed. The main exceptions are small businesses that would struggle to comply with the sales-tax regimes of 10,000 or so jurisdictions.
Online commerce has “grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” the Chief Justice explains. The irony, as he points out, is that Justices Thomas and Kennedy along with Antonin Scalia decided Quill based on stare decisis when many fewer businesses relied on the Court’s standard than do now.
Congress has been debating how to supersede Quill for some years. A bipartisan bill from House Judiciary Chairman
would allow states to require businesses to collect sales tax at a single, statewide rate with revenues distributed through a national clearinghouse. This would at least simplify compliance.
But as Chief Justice Roberts wisely notes, “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.” The Court’s decision in effect declares open season for rapacious politicians to tax online commerce. Members of Congress from spendthrift states may be less inclined to legislate a solution.
Justice Kennedy suggests that courts can be a check on greedy states and cities if they go too far and impose undue burdens on interstate commerce. But states will no doubt interpret the Court’s reversal as a green light to challenge the limits of their taxing authority. Small, remote retailers will have to prove in local courts that state and municipal tax laws run afoul of the Court’s Wayfair ruling. Godspeed.
Justice Kennedy suggests that South Dakota’s law, which exempts retailers with fewer than 200 transactions in the state, is a model because it “affords small merchants a reasonable degree of protection.” But a California or New York law with similar exemptions would be far more burdensome since selling 200 items in their huge retail markets would be more common.
States may also interpret the majority’s ruling as a go-ahead to tax other kinds of online commerce such as media downloads and streaming. As their public pension costs explode, Connecticut and New Jersey will grasp far and wide. While big businesses may manage, smaller ones will be hard-pressed—and consumers will pay more in any case.
Congress now needs to act to prevent this considerable damage, but in the meantime there will be plenty of casualties.