Opinions: Internet Taxation

On Thursday, June 21, the Court released its opinion in South Dakota v. Wayfair, Inc., one of two cases decided last month in which the Court reversed its own precedent. (The second case was Janus v. AFSCME.) Wayfair is a case with important tax ramifications for both consumers and online retailers, as it involved a South Dakota law requiring online retailers to pay sales tax on goods sold in the state. Prior to the law, sellers were required to collect and remit the tax, and if the sellers did not do so, consumers were responsible for paying a use tax at the same rate as the sales tax. Compliance with this requirement is notoriously low in all states with similar tax regimes. Prior Supreme Court precedents in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota, had limited a state’s ability to collect those taxes from sellers – saying that a state may not require a business that does not have a physical presence within the state to collect its sales tax..

Justice Kennedy wrote the opinion, joined by Justices Thomas, Ginsburg, Alito, and Gorsuch, overruling the Court’s prior precedent and upholding the South Dakota law. The Court held that the physical presence rule defined by Quill is no longer workable given the prevalence of online retail in the national economy. He maintained that the rule substantially disadvantaged small businesses because they generally met the physical presence rule and therefore had to collect sales tax – causing those businesses to charge the consumer higher prices. The physical presence rule also harms states, Justice Kennedy wrote, which are losing an estimated $8 to 33 billion per year in sales tax revenues as a result of the physical presence rule. The Court overruled the physical presence rule of Bellas Hess and Quill and remanded the case for further proceedings on whether or not South Dakota’s sales tax law violates the Commerce Clause in other ways.

Chief Justice Roberts wrote the dissenting opinion, joined by Justices Breyer, Sotomayor, and Kagan. The dissent argued that alteration to the physical presence rule has the potential to disrupt the growth of online retail, correspondingly interfering with the national economy. Justice Roberts contended that the bar is high for departing from stare decisis and demands “special justification,” particularly if Congress is better situated to address the issue. (Under the branch of Commerce Clause jurisprudence at issue here, known as the Dormant or Negative Commerce Clause, even if the Court strikes down certain state taxes or other regulations, Congress has the power to authorize them.) The dissent also pointed out that the exercise of figuring out tax rates in different jurisdictions will be difficult, with the burden falling disproportionately on small and “micro” businesses across the country.

Many commentators see this ruling as bad news for consumers and small businesses, who are likely to end up bearing the brunt of this decision. Investor’s Business Daily’s editorial, here, writes that this decision may have opened the door to letting states impose other taxes on out-of-state businesses. Jessica Melugin of the Center for Technology and Innovation at the Competitive Enterprise Institute writes in the New York Times that the decision will hurt online shopping by eliminating competition and decreasing political consequences to keep tax rates at reasonable levels. However, Justin Fox’s opinion on Bloomberg argues that the “Internet sales tax switch is good policy made the wrong way.”

The Court issued three other opinions on the same day as Wayfair. They are discussed here.

ISCOTUS Editorial Coordinator Anna Jirschele, Chicago-Kent Class of 2018, contributed to this post, which was overseen by ISCOTUS Co-Director and Chicago-Kent faculty member Carolyn Shapiro.

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