On April 17, 2018, the Supreme Court heard oral argument in South Dakota v. Wayfair, Inc, in which the state of South Dakota seeks to collect sales taxes on e-commerce companies despite the possible repercussions on interstate commerce and prior Supreme Court precedent.
The controversy over state taxation of e-commerce rests on the legal principle known as the Dormant Commerce Clause. Article I, Section 8 of the U.S. Constitution states that Congress shall have the power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” From this clause, legal scholars and courts have interpreted the Dormant Commerce Clause, which prohibits states from enacting laws that inappropriately burden or discriminate against interstate commerce. For example, the state of Virginia could enact a food safety law on all crabs sold in Virginia, as long as the law applied to Virginian and non-Virginian crabs, but could not enact the same law on Maryland crabs only.
Using the Dormant Commerce Clause as a rationale, the Supreme Court found in Quill Corp v. North Dakota (1992), that “remote sales” corporations, such as mail-order and e-commerce companies, were exempt from sales and use taxes, unless the corporations had a physical nexus, such as an office building or inventory storage warehouses, in the state. Essentially, the Supreme Court took from nexus-less states the power to levy sales taxes on e-commerce businesses, such as Amazon, ruling that such taxes would excessively burden interstate commerce.
In his concurring opinion in Direct Marketing Association v. Brohl (2015), Justice Kennedy articulated some of the problems with the ruling in Quill that had become evident over time. The mail-order sector, the majority of remote sales in Quill’s era, he wrote, was worth about $180 billion when Court decided Quill. In contrast, “by 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.” The National Conference of State Legislatures in 2012 estimated that states had forgone approximately $23 billion in revenue from remote sales that year. “It is unwise to delay any longer a reconsideration of the Court’s holding in Quill,” wrote Justice Kennedy in the concurrence. His words inspired many states, including Alabama, Indiana, South Dakota, Tennessee and Wyoming, to pass so-called “kill Quill” legislation taxing remote sales, with the intent of receiving a lawsuit and appealing it to the Supreme Court.
South Dakota’s “kill Quill” law was the first one to make it to Supreme Court. The law came into effect in May 2017, and required only e-commerce companies engaging in sales in excess of $100,000 or in over 200 unique sales transactions to log and pay taxes. Before the law came into effect, South Dakota sent out notices of lawsuits to four of the largest out-of-state e-commerce retailers who were not already collecting sales taxes to pay to the state — Wayfair, Overstock.com, Newegg, and Systemax. Systemax complied, but the other three sued the state. Upon appeal, the South Dakota Supreme Court ruled in favor of the retailers, using the precedent set in Quill. Thirty-five states and the District of Columbia joined in an amicus brief with South Dakota in its petition to have the case heard before the Supreme Court of the United States.
Through their briefs to the Supreme Court, attorneys for the petitioner attempted to demonstrate that the tax framework under Quill burdens interstate commerce. They did this by drawing a connection between the lack of use taxes on e-commerce giants and the demise of traditional brick-and-mortar stores, which have higher prices than online outlets’ prices because of traditional sales taxes from which online outlets are exempt.
The controversy in South Dakota v. Wayfair, Inc. also has a dimension of conflict as old as the nation itself: the institutional conflict between the federal government and the states. Before the Supreme Court agreed to hear the case, a bipartisan group of Congressmen — Rep. Robert Goodlatte (R-Va.), Sen. Ron Wyden (D-Ore.), Rep. Anna Eshoo (D-Calif.), Rep. Jim Sensenbrenner (R-Wis.), Sen. Mike Lee (R-Ut.), and Rep. Steve Chabot (R-Oh.) — filed an amicus brief arguing the Supreme Court should deny the petitioner, South Dakota, a writ of certiorari.
The congressional amicus brief justifies its position by affirming that the right to regulate interstate commerce is within Congress’s purview and that a lack of action so far on behalf of the federal legislature does not empower the Court to overturn precedent and grant this power to the states — the brief describes the negotiations over a bipartisan bill addressing the issue at hand as ongoing. The brief also points out that seventeen of the eighteen largest online retailers already collect sales taxes on in-store and online purchases (including Amazon, whose fulfillment centers count as a nexus under law) diminishing the need for the Court to overturn Quill.
However, a second bipartisan group of Congressmen, consisting of Sen. Heidi Heitkamp (D-N.D.), Sen. Lamar Alexander (R-Tenn.), Sen. Dick Durbin (D-Ill.), Sen. Mike Enzi (R-Wyo.), Rep. Kristi Noem (R-S.D.), and former Rep. John Conyers (D-Mich.), are more jaded about the political process, and have submitted an amicus brief asking the Supreme Court to overturn Quill. They point to the numerous failed or stagnant acts to rectify the issue, such as the numerous iterations of the “Marketplace Fairness Act”, none of which received a vote in both houses of Congress as is required to pass laws, as an example of legislative failure that invites a judicial solution.
At oral argument before the Supreme Court, the states’ attorney, Marty Jackley, and the justices touched on points ranging from Congress’s failure or reluctance to pass a bill taxing interstate commerce to the incentives for the federal government to act. After Jackley brought up how Congress hadn’t acted for 26 years after Quill to rectify the situation, Justice Kagan pointed out that Congressional inaction could speak to Congress’s viewpoint on the matter, while Justice Breyer pointed out that Rep. Goodlatte’s amicus brief stated that the Supreme Court’s decision to take the case actually halted progress in Congress on the latest iteration of the Marketplace Fairness Act. Jackley also argued that, because the act of Congress would be a seen as a tax, a politically unfavorable move, but the revenue would not go to the federal Treasury, a favorable move, incentive structures favored action by the states.
Also at oral argument, the attorney representing the U.S. government, Deputy Solicitor General Malcolm Stewart, took the side of Wayfair and the companies in order to preserve Quill and allow Congress to make the decision on e-commerce taxation. Stewart argued that if Quill were overturned, the smallest businesses — such as single individuals shipping their products to another individual — would qualify as taxable per the “nexus” framework, and thus be subject to burdensome costs of collecting taxes for states. Stewart pointed out that the 80 to 100 largest Internet retailers collected state taxes, rendering the controversy moot.
After Stewart, George Isaacson, the attorney representing Wayfair’s side of the case, argued that the repeal of Quill would create an unconstitutionally complex taxation landscape due to the multiple jurisdictions, per precedent in the 1967 case National Bellas Hess v. Illinois Department of Revenue. However, during his comments, Justices Gorsuch and Breyer took harder positions and focused on the empirical elements of the case. After Isaacson suggested that compliance with state tax collection costs business $250,000, Justice Gorsuch pointed out that the states’ attorney, Marty Jackley, had clarified that the cost estimate was sliding, and cost just $12 at its lowest point. Justice Breyer grilled Isaacson for specific figures on how much Amazon faced in costs to collect taxes for the states, and whether that matched the benefits Amazon reaped from selling its wares online.
In the short run, a Supreme Court decision in either direction won’t change the e-commerce landscape drastically, other than filling states’ coffers with a few extra million or billion dollars in revenue. Perhaps the greater takeaway from the case is that political dysfunction — manifested through legislative gridlock and a refusal to conduct oversight on the executive branch — is transforming our political system from three co-equal branches of government into a system in which the legislative branch empowers the executive and judiciary at its own expense.