Don’t Assume the Supreme Court Will Open the Door For New Internet Taxes
Multiple legal scholars are telling state tax collectors to gear-up for a favorable ruling from the US Supreme Court that will empower them to harass businesses across the country. At issue before the court, in South Dakota v Wayfair, is the ability of state to impose new tax burdens on businesses with no physical presence.
In essence, if South Dakota wins, every online and catalog seller would need to follow the sales tax laws and rules for over 12,000 different jurisdictions and be subject to 46 state audits.
Over the past sixty-years the US Supreme Court has found these state obligations on out-of-state businesses a violation of the dormant commerce clause of the US Constitution. The most recent decision was the 1992 case of Quill v. North Dakota where an 8–1 decision told the state they could only impose sales tax burdens on its own businesses, not out-of-state ones.
After the 1992 ruling, states might have earned the right to tax out-of-state businesses if the states significantly simplified their tax regimes. But rather than complete the hard work, the state of South Dakota decided to just relitigate the same old issue.
These tax advocates should realize that Thomas may not help them, and in fact, Kennedy might not either.
Following oral arguments in April, we are now waiting on the court’s decision. And tax collectors are expecting a favorable ruling from the Court that overturns the 1992 decision in Quill. They think they have a majority of justices voting with them.
State tax collectors are counting on a vote from Justice Thomas to put them over the top. Knowing that Justice Thomas isn’t a fan of the dormant commerce clause, one of the many issues at play in Wayfair, these tax-advocates are already counting his vote.
Too bad they haven’t looked back more than a couple of years. If they did see what Thomas, Kennedy, and Scalia all agreed in Quill, these tax advocates would realize that Thomas may not help them, and in fact, Kennedy might not either.
When the Supreme Court decided in Quill that North Dakota couldn’t force an out-of-state business to collect its taxes, Justice Scalia wrote a concurrence joined by Thomas and Kennedy.
Rather than focus on whether North Dakota violated the Constitution’s Commerce Clause, their concurrence focused on the issue of “stare decisis” — Latin for “to stand by things decided.” As their concurrence eloquently says:
“Having affirmatively suggested that the ‘physical presence’ rule could be reconciled with our new jurisprudence, we ought not visit economic hardship upon those who took us at our word.”
Their concurrence went on to say:
“It is strangely incompatible with this to demand that private parties anticipate our overrulings. It is my view, in short, that reliance upon a square, unabandoned holding of the Supreme Court is always justifiable reliance.”
When looking to what this means for Wayfair — while Justices Thomas and Kennedy may not be a fan of dormant commerce clause or may consider engaging the court in what is really a legislative matter, their first priority today, just as it was in 1992, is to stare decisis.
So, when pro-tax advocates are saying they are going to win the day, they should remember to not count their tax dollars too soon and remember the importance of respect for court precedent.