The Supreme Court ruled five to four in South Dakota v. Wayfair, Inc. that South Dakota can require out-of-state online retailers with no employees or physical presence in the state to collect sales tax from online purchases made by residents of their state.
Supreme Court Justices Anthony Kennedy, Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch made up the majority. Chief Justice John Roberts, as well as, Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan dissented.
A 1992 Supreme Court precedent (Quill v. North Dakota) prevented states from requiring out-of-state companies to collect sales tax on sales it makes to the state’s residents if they do not have a physical presence in the state. The state of South Dakota is dependent on sales tax as they are one of nine states that do not have an income tax. The state estimates that it loses between $48 to $58 million annually as a result of two previous Supreme Court decisions.
In 2016, the South Dakota State Legislature passed a law that requires out-of-state online retailers to collect sales tax if they clear $100,000 in sales or 200 separate transactions.
A group of online retailers, Wayfair Inc, Overstock.com, Inc and Newegg Inc, challenged the law in court. A lower state court placed an injunction on the law, and the South Dakota Supreme Court ruled in favor of the retailers because of the Supreme Court precedent.
Justice Anthony Kennedy, writing the majority opinion, said in today’s economy the physical presence requirement is a poor one. “(U)nder Quill, a small company with diverse physical presence might be equally or more burdened by compliance costs than a large remote seller. The physical presence rule is a poor proxy for the compliance costs faced by companies that do business in multiple States,” he wrote.
He noted the 1992 precedent “puts both local businesses and many interstate businesses with physical presence at a competitive disad vantage relative to remote sellers.”
He said even worse, the Quill precedent “produces an incentive to avoid physical presence in multiple States.”
“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,” Kennedy wrote.
He also noted that Supreme Court precedent stands in the way of states’ sovereign authority to collect taxes. “The physical presence rule as defined and enforced inBellas Hess and Quill is not just a technical legal problem—it is an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions,” he stated.
He also noted that South Dakota’s law is far while the precedent is not. “(T)here is nothing unfair about requiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collection. 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…an increased share of the taxes,” he wrote.
“In the name of federalism and free markets, Quill does harm to both. The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field,” he added.
“Here, stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power,” Kennedy stated. “If it becomes apparent that the Court’s Commerce Clause decisions prohibit the States from exercising their lawful sovereign powers in our federal system, the Court should be vigilant in correcting the error.”
Both Kennedy and Thomas were on the majority that decided Quill, but changed their mind over 25 years later.
He also noted that South Dakota provides some protection for small merchants, “The law at issue requires a merchant to collect the tax only if it does a considerable amount of business in the State; the law is not retroactive; and South Dakota is a party to the Streamlined Sales and Use Tax Agreement.”
Roberts writing the dissenting opinion noted that in previous precedent, the Court left it up to Congress to correct any disparities between in-state and out-of-state retailers.
“In Quill, this Court emphasized that the decision to hew to the physical-presence rule on stare decisis grounds was ‘made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve,'” Roberts wrote.
“This is neither the first, nor the second, but the third time this Court has been asked whether a State may obligate sellers with no physical presence within its borders to collect tax on sales to residents. Whatever salience the adage ‘third time’s a charm’ has in daily life, it is a poor guide to Supreme Court decisionmaking,” he added.
He noted the Court may have prevented a legislative solution. “But by suddenly changing the ground rules, 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,” Roberts argued.
Read the majority, concurring and dissenting opinions below: