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Supreme Court Says States May Require Sales Tax Payment On Internet Sales By Merchants with No Presence in the State.

Posted By Cliff Tuttle | June 22, 2018

No. 1,508

SOUTH DAKOTA v. WAYFAIR, INC., ET AL., NO. 17-494, 585 U.S._____  (DECIDED JUNE 21, 2018)

[NOTE: Full Opinion is linked above. Verbatim excerpts from the opinion are reprinted below in bold italics.  Consult the link for the full text.]

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The Supreme Court revisited its interpretation of the Commerce Clause in two prior cases, National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967); Quill Corp. v. North Dakota, 504 U. S. 298 (1992).  The Court granted certiorari to reconsider the scope and validity of the physical presence rule mandated by those cases.

The Court’s Opinion, authored by Mr. Justice Kennedy stated:

 The Constitution grants Congress the power “[t]o regu­late Commerce . . . among the several States.” Art. I, §8, cl. 3. The Commerce Clause “reflect[s] a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tenden­ cies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation.

Under the Commerce clause, it has been held that the states may not enact legislation or impose regulations that hinder interstate commerce.  However, taxation of commerce has not been prohibited, so long as it does not discriminate against interstate commerce in favor of local commerce or impose undue burdens upon it. Over time, caselaw has developed whereby the Courts have sought to find a suitable nexus between the interstate business activity and the state of the consumer.  Thus, the physical presence rule. Due process is a parallel, but not identical, consideration.

South Dakota, which does not have an income tax, relies heavily upon sales tax.  As ecommence has flourished, it has seen an increasing volume of purchases escape its sales tax since the merchants do not have a physical presence in the State. The Supreme Court, which not so long ago thought that physical presence was a suitable nexus under the Commerce Clause, has decided that the world has changed. Indeed it has. [Bold italics below are from the Opinion]

In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced.

Worse still, the rule produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable. 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.

The Court continues:

Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill…. But it is not clear why a single employee or a single warehouse should create a substantial nexus while “physi­cal” aspects of pervasive modern technology should not. For example, a company with a website accessible in South Dakota may be said to have a physical presence in the State via the customers’ computers. A website may leave cookies saved to the customers’ hard drives, or customers may download the company’s app onto their phones. Or a company may lease data storage that is permanently, or even occasionally, located in South Dakota. Cf. United States v. Microsoft Corp., 584 U. S. ___ (2018) (per curiam). 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. 504 U. S., at 315.

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, underQuill, simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State.

In a coupe de grace, the Court then throws the language of Quill back in the face of the electronic retailer who seeks to avoid tax imposed by their brick and mortar competitors.

Wayfair offers to sell a vast selection of furnishings. Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that “‘[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.'” Brief for Petitioner 55. What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments. State taxes fund the police and fire departments that protect the homes containing their customers’ furniture and ensure goods are safely delivered; maintain the public roads and municipal ser­vices that allow communication with and access to cus­tomers; support the “sound local banking institutions to support credit transactions [and] courts to ensure collec­tion of the purchase price,” Quill, 504 U. S., at 328

According to respondents, it is unfair to stymie their tax-free solicita­ tion of customers. But there is nothing unfair about re­ quiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collec­ tion. Fairness dictates quite the opposite result. Helping respondents’ customers evade a lawful tax unfairly shifts to those consumers who buy from their competitors with a physical presence that satisfies Quill—even one ware­ house or one salesperson—an increased share of the taxes. It is essential to public confidence in the tax system that the Court avoid creating inequitable exceptions.

Further, the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the “far-reaching systemic and structural changes in the economy” and “many other societal dimensions” caused by the Cyber Age. Direct Marketing, 575 U.S., at ___ (KENNEDY, J., concurring) (slip op., at 3). Though Quill was wrong on its own terms when it was decided in 1992, since then the Internet revolution has made its earlier error all the more egregious and harmful.




CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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