Supreme Court: Constitution Allows States to Tax the Internet

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Washington, DC

WASHINGTON, DC – The Supreme Court on Thursday held in a 5-4 decision that the U.S. Constitution permits states to tax sales on the Internet unless Congress passes a law to prevent such taxation, scaling back judicial power long criticized by conservatives, and putting the ball in Congress’s court.

“When a consumer purchases goods or services, the consumer’s State often imposes a sales tax. This case requires the Court to determine when an out-of-state seller can be required to collect and remit that tax,” Justice Anthony Kennedy began for the Court. “All concede that taxing the sales in question here is lawful. The question is whether the out-of-state seller can be held responsible for its payment, and this turns on a proper interpretation of the Commerce Clause” of the Constitution.

The Commerce Clause is Article I, Section 8, Clause 3 of the Constitution, and grants Congress the power “to regulate Commerce … among the several States.”

“In two earlier cases the Court held that an out-of-state seller’s liability to collect and remit the tax to the consum­er’s State depended on whether the seller had a physical presence in that State, but that mere shipment of goods into the consumer’s State, following an order from a cata­log, did not satisfy the physical presence requirement,” he added.

“Under this Court’s decisions in Bellas Hess and Quill, South Dakota may not require a business to collect its sales tax if the business lacks a physical presence in the State,” Kennedy went on, citing the two precedents the Court was being asked to reconsider. “Without that physical presence, South Dakota instead must rely on its residents to pay the use tax owed on their purchases from out-of-state sellers.”

South Dakota is one of several states hit hard by Internet sales from which the state cannot take tax revenue, resulting in the state passing a law that provided, “Whereas, this Act is neces­sary for the support of the state government and its exist­ing public institutions, an emergency is hereby declared to exist.”

“To that end, the Act requires out-of-state sellers to collect and remit sales tax as if the seller had a physical presence in the state,” Kennedy explained in the Supreme Court’s opinion, resulting in a lawsuit involving several companies that have online presences in South Dakota, but have no salespeople or stores in the state.

Kennedy quoted the Supreme Court’s 1977 decision in Complete Auto, regarding which Kennedy said:

The Court held that a State may tax exclu­sively interstate commerce so long as the tax does not create any effect forbidden by the Commerce Clause. After all, interstate commerce may be required to pay its fair share of state taxes. The Court will sus­tain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing State, (2) is fairly ap­portioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the State provides.

“The physical presence rule has been the target of criti­cism over many years from many quarters,” he explained. “Quill, it has been said, was premised on assumptions that are unfounded and riddled with internal inconsistencies. Quill created an inefficient ‘online sales tax loophole’ that gives out-of-state businesses an advantage.”

“The Court should focus on rules that are appropriate to the twenty-first century, not the nine­teenth,” the majority added. “Each year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States.”

Quill puts both local businesses and many interstate businesses with physical presence at a competitive disad­vantage relative to remote sellers,” the Court reasoned. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”

“Worse still, the rule produces an incentive to avoid physical presence in multiple States,” Kennedy continued. “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 Court then overruled Bella Hess and Quill, declaring, “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.”

“It is inconsistent with the Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation,” the Court held. “It is currently the Court, and not Congress, that is limiting the lawful prerogatives of the States,” abolishing the no-online-sales-tax rule unless Congress decides to prevent such taxes by statute.

The three most conservative justices joined Kennedy’s opinion, as did liberal Justice Ruth Bader Ginsburg.

Justice Clarence Thomas wrote a separate concurring opinion after joining Kennedy’s majority opinion, noting that in 1992 only one justice in Quill voted to overrule the physical-presence rule. “I should have joined his opinion,” lamented Thomas.

“The same is true for this Court’s entire negative Commerce Clause jurisprudence,” Thomas added, referring to the Supreme Court’s doctrine restricting laws that burden interstate commerce even when Congress passes no law to regulate the matter. He urged his fellow justices to take on the entire issue, adding that “it is never too late to surrender former views to a better considered position.”

Justice Gorsuch likewise wrote a concurring opinion after joining Kennedy’s, signaling that he might agree with Thomas, as the newest justice wrote:

My agreement with the Court’s discussion of the history of our dormant commerce clause jurisprudence, however, should not be mistaken for agreement with all aspects of the doctrine. The Commerce Clause is found in Article I and authorizes Congress to regulate interstate commerce. Meanwhile our dormant commerce cases suggest Article III courts may invalidate state laws that offend no congressional statute. Whether and how much of this can be squared with the text of the Commerce Clause, justified by stare decisis [i.e., adhering to precedent], or defended as misbranded products of federalism or antidiscrimination imperatives flowing from Article IV’s Privileges and Immunities Clause are questions for another day.

Chief Justice John Roberts dissented, joined by the three remaining liberal justices, saying they would leave the restriction in place unless Congress passed a law to the contrary.

Today’s decision will be hailed by constitutional conservatives as a victory for federalism and the Tenth Amendment, but will be vigorously opposed by many in the business community, who are sure to lobby Congress to pass a law promptly to restore the no-tax rule by statute.

The case is South Dakota v. Wayfair, No. 17-494 in the Supreme Court of the United States.

Ken Klukowski is senior legal editor for Breitbart News. Follow him on Twitter @kenklukowski.

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