By deciding to review Wayfair v. South Dakota, the US Supreme Court has thrust itself into the long and contentious debate about the proper tax treatment of internet sales. As I argue, the Court should use this opportunity to overturn Quill v. North Dakota. In light of the relevant political process concerns, the Supreme Court should overrule Quill in the Court’s role as guardian of the states against federal commandeering.
In 1992, the Court in Quill held that, under the dormant Commerce Clause of the federal Constitution, a state may not require an out-of-state retailer to collect the state’s sales tax. States, Quill held, can only impose tax collection responsibilities upon sellers who are physically present in the taxing state. Quill was decided before the internet and electronic commerce became central features of American economic life.
As a matter of law, an internet purchaser who pays no sales tax at the time of their purchase is obligated to forward tax on their purchase by themselves. In practice, few purchasers pay tax on their internet purchases. Thus, many internet purchases are effectively sales tax-free since the tax is neither withheld by the out-of-state seller at the time of purchase nor subsequently paid by the in-state shopper.
This is unfair to the states, as the states in practice cannot collect the sales tax owed to them on internet purchases. This result is also unfair to in-state, brick-and-mortar sellers who must collect sales tax and are consequently disadvantaged vis-a-vis out-of-state competitors who can sell effectively (albeit illegally) sales tax-free on the internet.
Concurring in Direct Marketing Association v. Brohl, Justice Anthony Kennedy suggested that it is time for the Court to reconsider Quill and thereby permit states to require out-of-state vendors to collect sales taxes on their internet sales even though such vendors lack physical presence in the taxing state.
South Dakota embraced this suggestion. In a direct challenge to Quill, South Dakota required out-of-state sellers to collect its sales tax if a seller’s annual sales volume to South Dakota purchasers meets or exceeds $100,000, or consists of 200 or more separate transactions.
Wayfair and other internet sellers without a physical presence in South Dakota challenged their new sales tax collection obligation under this South Dakota law. South Dakota’s Supreme Court struck that the state’s new sales tax collection law as violating Quill. The US Supreme Court is now reviewing this decision of the South Dakota court.
The US Supreme Court could use Wayfair to reaffirm Quill and its physical presence test. That would leave matters where they have stood for the last twenty-five years: Since Quill is a dormant Commerce Clause decision, Congress can overturn it legislatively and permit states to impose sales tax collection responsibilities on out-of-state sellers.
It would be better for the Court instead to grapple with the obvious unsuitability of Quill and its physical presence test in the modern world. That Quill’s physical presence rule is incompatible with internet commerce is the easy part. The more challenging task for the Court is its respect for its own precedent, particularly when (like Quill) that precedent can be modified or overturned by Congress.
Notwithstanding the Court’s compelling concern for its precedent, the Court should overturn Quill in the Court’s role as guardian of the states against federal commandeering and considering compelling concerns about the political process. These concerns include the tactical advantage which Quill bestows in the political process upon the internet and mail order industries, the importance of the states in the structure of federalism, the centrality of sales taxes to the financing of state government, the severe impediment which Quill and its physical presence test impose upon the collection of these taxes, and the unique disadvantages of the states in the federal legislative process.
In our system of federalism today, the states are structurally important but politically disadvantaged. Federal legislators receive no political benefits from helping the states. This contrasts with the political support – votes and campaign contributions – private groups bestow for legislative backing.
Quill effectively commandeers the states to subsidize internet commerce by not taxing it. Quill also hands great political advantage to the defenders of the status quo, the internet and mail order sales industries which effectively sell their goods sales tax-free because Quill’s physical presence test denies the states the ability to impose tax collection responsibilities on out-of-state internet and mail order sellers. In the federal lawmaking process, defenders of current law have the politically easier task of blocking change in a process which affords them many opportunities to obstruct change. Quill gives that advantage to the internet and mail order industries which merely impede legislation to preserve the status quo – as they have done successfully for over two decades.
Because of these political process concerns, the Supreme Court itself should, despite the force of stare decisis, use Wayfair to overturn Quill rather than rely on Congress to abolish Quill’s physical presence test. That test severely hampers the states’ collection of their sales taxes in the face of the growth of internet commerce. The Court should overturn Quill in the Court’s role as guardian of the states against federal commandeering, and in light of compelling concerns about the political process, which hands great tactical advantage to the internet sales industry as defender of the effectively tax-free status quo.
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