Constitution Daily

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Supreme Court set to tackle Internet sales tax question

March 8, 2018 by Scott Bomboy


One of the most closely watched Supreme Court cases in April could affect the shopping habits of millions of Americans, as the Justices consider taxes paid on Internet product sales in South Dakota v. Wayfair, Inc.

Last year, the Commerce Department said Americans spent $456 billion in ecommerce retail purchases, an amount equal to 13 percent of all retails sales in the United States. But not all states require consumers to pay taxes on Internet sales. Big online retailers, like Amazon, do charge sales taxes, even though they don’t own a physical building in some states. But others don't.

State and local governments claim they are missing out on $13 billion annually in sales tax revenues from Internet businesses. Those Internet businesses believe a 1992 Supreme Court decision, Quill Corp. v. Heitkamp, supports an argument that states can’t force sales or use taxes on businesses that lack a physical presence in a state, and Congress is the best place to decide such taxing disputes.

The Quill decision has its roots in an older Court case. In National Bellas Hess v. Illinois (1967), the Court said states could collect sales tax from retailers who had stores, warehouses or another “physical presence” in a state, but not catalog sales. “The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control,” said Justice Potter Stewart.

About 25 years later, the Court found in Quill that states had a right under the Due Process Clause of the Constitution to collect sales taxes, but the burden placed on out-of-state businesses to collect the taxes ran afoul of the Commerce Clause. “The State’s enforcement of the use tax against Quill places an unconstitutional burden on interstate commerce,” said Justice John Paul Stevens. The Court then said that the “underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”

South Dakota is challenging the Quill precedent. In 2010, it passed a new law ordering out-of-state retailers to collect and send to it sales taxes, if they sold a significant amount of goods to South Dakota buyers, or if they made frequent transactions with customers in South Dakota.

South Dakota then sued three online retailers, Wayfair Inc.,, Inc., and Newegg, Inc., for not paying the taxes, in a test case.

The state’s petition to the Court squarely targeted several Justices who had publicly doubted the Quill precedent. “Quill has grown only more doctrinally aberrant, and has been roundly criticized by members of this Court, including Justices Kennedy, Thomas, and Gorsuch. But while its legal rationales have imploded with experience, its practical impacts have exploded with the rapid growth of online commerce,” said the state’s attorneys.

In January 2018, the Justices accepted the petition and decided to settle one question: “Should this Court abrogate Quill’s sales-tax-only physical presence requirement?”

There is a long line of briefs in the case supporting one side or the other, or offering differing solutions. A group of Senators and Representatives believes Congress, and not the Supreme Court, should settle the matter. “The Constitution assigned to Congress the domain and power to regulate and control commerce among the States,” they argued before the Court accepted the case.

The National Governors Association supports South Dakota’s approach of offering an “economic presence” test in place of the physical-presence rule. “Economic presence ensures that interstate commerce pays its fair share of state taxes without unduly burdening interstate commerce,” it concluded in a friend of the court brief. Four U.S. Senators are also supporting South Dakota.

And on March 5, the Justice Department submitted its own brief supporting South Dakota. “To be sure, this Court is particularly reluctant to overrule precedents that Congress has power to overturn. But the nature of an Internet retailer’s presence in the States where its website is accessible is different in kind from any type of “presence” that the Court could have anticipated when Quill was decided,” it argued. “The Court should hold that a retailer’s Internet presence in South Dakota provides a sufficient basis for requiring it to collect state sales taxes from its customers.”

Arguments in South Dakota v. Wayfair, Inc. will be held on April 17.

Scott Bomboy is editior in chief of the National Constitution Center.


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