South Dakota v. Wayfair: A Taxing Decision

Today, the Supreme Court handed the states a victory in their battle to collect taxes on online sales, but, in doing so, dealt a heavy loss to the national market, small businesses, and the people at large. South Dakota v. Wayfair’s focus was on whether to overturn Quill Corp. v. North Dakota, which held that states could not impose tax collection obligations on businesses with no physical presence in the state. In a bizarrely split 5-4 decision–with Justice Kennedy writing the majority joined by Thomas, Ginsburg, Alito, and Gorsuch and Chief Justice Roberts writing the dissent joined by Breyer, Sotomayor, and Kagan–the Court held that states can charge sales taxes on completely out-of-state businesses.

As the dissent rightly points out, the majority decided Wayfair with “an inexplicable sense of urgency,” asserting that “the passage of time is only increasing the need to take the extraordinary step of overruling” longstanding precedent. While wrongly decided cases need to be dealt with, Quill was not one of those decisions. As the chief justice correctly observes in his dissent: “E-commerce 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.” In fact, amicus briefs for various senators and members of Congress were submitted to the Court highlighting the ongoing efforts to fix the e-commerce sales-tax system, and three bills are currently pending. “By suddenly changing the ground rules,” the chief justice warns, “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.”

The majority in Wayfair mislabel Quill as some sort of decrepit roadblock to sensible internet jurisprudence, but the reality couldn’t be any more different. Quill was a safeguard that made states consider who they were taxing and why. Classic considerations like whether a taxpayer availed themselves of state services like fire and police were taken into consideration. Now that is thrown into disarray, as state lines mean less for the limits of state power.

Where e-commerce customers live does not change the fact that companies like Wayfair had no opportunity to vote in state elections or influence state policy. What the majority in Wayfair misses is that this is less a matter of petty tax avoidance than a question of the limits of state power. States were frustrated with the inability to collect taxes from out-of-state retailers under Quill, but governments around the world are prone to complain about the difficulties of collecting taxes. As we wrote in our amicus brief supporting Wayfair, “the Framers would not recognize the concern South Dakota poses: that interstate commerce is thriving to such an extent that collection of a particular type of tax has become difficult.”

While Quill was decided in the days when 28.8k modems beeped and hissed, the question of due process was no different. Due process requires some definite link between the state and any person, property, or transaction that a state seeks to tax or regulate. Wayfair does not own property in South Dakota, elects no representatives in South Dakota, and was afforded no protection by South Dakota’s police. The internet economy has blossomed and improved the lives of a great many, but it has not given rise to a great excuse to rewriting the Commerce Clause. Unfortunately, the Court missed the mark here by focusing far too much on whether and how states can collect revenue.