The Common Law and the Commerce Clause
There’s a strong argument for overturning the Supreme Court’s Quill precedent based on . . . Supreme Court precedent
South Dakota’s highest court, in a unanimous decision released this morning, struck down a 2016 state law requiring out-of-state retailers to collect sales taxes on transactions with state residents. The decision was entirely expected: the U.S. Supreme Court held in the 1992 case Quill v. North Dakota that under the Dormant Commerce Clause, states can collect sales taxes only from retailers with a “physical presence” in the state. South Dakota legislators knew when they passed the 2016 law that their state courts would strike it down, thus teeing up a case for the Supreme Court to reconsider its Quill precedent. The Justices will decide in a matter of months whether to take up South Dakota’s challenge.
The strongest argument for retaining the Quill precedent is just that: Quill is precedent. In fact, the 25-year-old Quill precedent was itself based on a decision 25 years earlier in National Bellas Hess, Inc. v. Department of Revenue of Illinois, in which the Court held that Illinois could not compel a mail-order merchandiser based in Missouri to collect taxes on sales across state lines. Justice Scalia, who filed a concurrence in Quill joined by Justices Kennedy and Thomas, put the argument this way:
I . . . agree that the Commerce Clause holding of Bellas Hess should not be overruled. Unlike the Court, however, I would not revisit the merits of that holding, but would adhere to it on the basis of stare decisis. Congress has the final say over regulation of interstate commerce, and it can change the rule of Bellas Hess by simply saying so. We have long recognized that the doctrine of stare decisis has special force where Congress remains free to alter what we have done.
There are (at least) three potential ways to rebut Scalia’s argument. The first is to emphasize just how terrible the Bella Hess/Quill rule is. It costs states more than $23 billion a year in uncollected sales taxes; it puts brick-and-mortar retailers at a competitive disadvantage vis-à-vis their Internet-only rivals; and it discourages retailers from opening new stores or distribution centers in additional states because expanding their physical presence will trigger sales tax collection obligations.
This first argument goes to show that Bella Hess and Quill were wrong. But as Justice Kagan put it in her majority opinion in the 2015 case Kimble v. Marvel Entertainment, LLC:
Respecting stare decisis means sticking to some wrong decisions. The doctrine rests on the idea, as Justice Brandeis famously wrote, that it is usually “more important that the applicable rule of law be settled than that it be settled right.” Indeed, stare decisis has consequence only to the extent it sustains incorrect decisions; correct judgments have no need for that principle to prop them up. Accordingly, an argument that we got something wrong — even a good argument to that effect — cannot by itself justify scrapping settled precedent. . . . To reverse course, we require . . . a special justification — over and above the belief that the precedent was wrongly decided.
Now, it may be the case that Bella Hess and Quill were so wrong that the “special justification” threshold can be surmounted on the basis of sheer wrongness alone. As a second line of attack, South Dakota might argue that the empirical premise underlying Justice Scalia’s concurrence — that “Congress . . . change change the [physical presence] rule . . . by simply saying so” — is itself faulty. Lawmakers on Capitol Hill have tried for years to change the physical presence rule — and failed. The reality of legislative gridlock reveals that Justice Scalia’s argument is based on a legal fiction.
Congress came close to overriding Bella Hess and Quill in 2013, when the Senate voted 69–27 to pass the Marketplace Fairness Act. That bill would have required retailers to collect state sales taxes if their transactions across state lines exceeded $1 million a year, provided that the state seeking to impose sales taxes took certain steps toward simplifying compliance (such as providing retailers with free software to facilitate filing). But the chair of the House Judiciary Committee, Bob Goodlatte (R-Va.), stopped the measure from advancing in the lower chamber. (The second largest contributor to Goodlatte is, incidentally, Alphabet Inc., which is also, incidentally, part of a coalition of companies opposing the bill.)
Ed Zelinsky has argued — eloquently — that the Court cannot rely on Congress to fix Bella Hess and Quill because the political deck is stacked in favor of the online retailers who benefit from those decisions and against the states that lose out. (An argument to the contrary is that states now have powerful brick-and-mortar retailers on their side, including Wal-Mart, Kroger, Home Depot, and a certain corporation with a $475 billion market cap that now owns a brick-and-mortar grocery store chain.) It remains to be seen whether the anti-Quill interests can overcome Congressman Goodlatte’s intransigence. But whether or not they can, there is a third — and in my view, compelling — reason for the Supreme Court to dispense with its Quill precedent here.
And that reason is — perhaps surprisingly — precedent. More precisely: The Supreme Court has precedents, and then it has precedents about precedents (what we might call “meta-precedents”). The Supreme Court’s first-order precedents tell other actors (e.g., states, firms, individuals, or lower court judges) what they can or cannot do. The Supreme Court’s meta-precedents tell the Justices when they should follow or discard their own first-order precedents.
Quill, like Bella Hess before it, is a first-order precedent: it tells states that they cannot collect sales taxes from retailers who lack an in-state physical presence. The Court’s 1977 decision in Complete Auto Transit, Inc. v. Brady also establishes a first-order precedent: it says that states can impose taxes on the “privilege” of doing business in the state when the privilege tax is calculated on the basis of the business’s gross income. But Complete Auto also establishes a meta-precedent. A quarter century prior to Complete Auto, the Court had ruled in Spector Motor Service v. O’Connor that states cannot impose privilege taxes on businesses engaged exclusively in interstate commerce. Complete Auto was in the business of transporting General Motors vehicles manufactured in Michigan to dealers in Mississippi, so under the Spector rule, Mississippi could not impose a privilege tax on Complete Auto.
But rather than striking down the Mississippi tax, the Justices overruled Spector. Justice Blackmun, writing for a unanimous Court, said that “[s]imply put, the Spector rule does not address the problems with which the Commerce Clause is concerned.” Stare decisis proved to be no barrier to fixing Spector’s mistake.
How can we make sense of Complete Auto, given what the Court has said about stare decisis in cases such as Kimble? Justice Kagan’s opinion in Kimble itself supplies an answer. There, the petitioner asked the Supreme Court to overturn a decision interpreting the Patent Act. In support of his argument, the petitioner cited several cases in which the Supreme Court had overturned antitrust precedents that concluded were mistaken. Justice Kagan rejected the argument, explaining:
If [this] were an antitrust rather than a patent case, we might answer both questions as Kimble would like. This Court has viewed stare decisis as having less-than-usual force in cases involving the Sherman Act. Congress, we have explained, intended that law’s reference to “restraint of trade” to have changing content, and authorized courts to oversee the term’s dynamic potential. We have therefore felt relatively free to revise our legal analysis as economic understanding evolves and (just as Kimble notes) to reverse antitrust precedents that misperceived a practice’s competitive consequences. Moreover, because the question in those cases was whether the challenged activity restrained trade, the Court’s rulings necessarily turned on its understanding of economics. Accordingly, to overturn the decisions in light of sounder economic reasoning was to take them on their own terms.
Complete Auto can be interpreted as setting a meta-precedent that treats the dormant commerce clause like antitrust. While Complete Auto does not fully articulate the basis for this conclusion, a comparison between the dormant commerce clause and antitrust contexts suggests a plausible rationale. Dormant commerce clause doctrine, like antitrust law, is oriented around fighting “restraint of trade”: the goal of the doctrine is to prevent states from adopting protectionist measures that interfere with cross-border commercial activity. This area of law is often informed by economic analysis — indeed, the entire dormant commerce clause doctrine is a product of common law-like decisionmaking by Justices seeking “a way to preserve economic union” among the 50 states.
The case for an antitrust-like approach to precedent is particularly strong in the dormant commerce clause context given the federalism concerns that loom over the doctrine. Bella Hess and Quill are instances of the Supreme Court overruling state court decisions defining whom states can and cannot tax. In Justice Stewart’s words, “[t]he very essence of a healthy federalism depends upon the avoidance of needless conflict between state and federal courts.” Whatever the case for “sticking to some wrong decisions” in other contexts, that case is particularly weak when sticking to wrong decisions leads to federal-state conflict.
Complete Auto is not the only case in which the Supreme Court has overruled a prior dormant commerce clause decision. See, e.g., Department of Revenue of Washington v. Association of Washington Stevedoring Cos., 435 U.S. 734, 749–50 (1978) (overruling Puget Sound Stevedoring Co. v. State Tax Commission, 320 U.S. 90 (1937) and Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947)); Healy v. Beer Institute, 491 U.S. 324, 343 (1989) (overruling Joseph E. Seagram & Sons, Inc. v. Hostetter, 384 U.S. 35 (1966)). In dormant commerce clause cases, like in antitrust cases, the Court has “felt relatively free to revise [its] legal analysis as economic understanding evolves and . . . to reverse . . . precedents that misperceived a practice’s competitive consequences.” In other words, the Court has followed a meta-precedent about its treatment of first-order dormant commerce clause precedents that differs from its meta-precedent in standard statutory contexts. Overruling Bella Hess and Quill would in this sense actually be consistent with the Court’s dormant commerce clause case law.
To be sure, the common law-like nature of the Supreme Court’s dormant commerce clause jurisprudence is not a sufficient reason for discarding Bella Hess and Quill. Critics of those decisions still bear the burden of showing why the first-order precedents are wrong on the merits. My more limited point is that stare decisis provides a very weak basis for adhering to those decision in light of the dormant commerce clause meta-precedent that the Supreme Court has developed over decades.