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Supreme Court Brings Tax Law Into The 21st Century

Court overturns its own precedent, because of this thing called 'the Internet.'

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The Supreme Court dropped a major bomb on American business today. In South Dakota v. Wayfair, the Court ruled that online retailers must collect state taxes regardless of whether the retailer has a “physical presence” in the state. It’s a major change to tax law, and the Court made the rare move of overturning one of its own precedents to achieve the ruling.

I already tried to explain why the Wayfair case is crucial when it was up for oral arguments. I can tell it wasn’t very persuasive, as almost none of you read my excellent preview (there’s still time). But if I can’t geekly convince you that this is a major decision with far reaching implications, then listen to your friend, the free market (courtesy of our Thad The Intern at Dealbreaker):

You don’t often see the markets immediately react to Supreme Court news, but that’s what happens when the Court rules that you finally have to pay taxes.

The case was 5-4, but the lineup didn’t break along “party lines.” Anthony Kennedy wrote the majority opinion, joined by Thomas, Alito, Gorsuch, and… Ruth Bader Ginsburg. Chief Justice John Roberts wrote the dissent, joined by Breyer, Sotomayor, and Kagan. That’s not a lineup you see every day.

And it’s not every day that you see the Court directly overturn its own precedents. The controlling cases here were National Bellas Hess, Inc. v. Department of Revenue of Ill., and Quill Corp. v. North Dakota. Both of those cases established that a retailer was only responsible for collecting state taxes if the retailer had a physical presence in the state.

South Dakota challenged this rule. Justice Kennedy agreed with them that those cases were wrongly decided, and cited this new thing called “the Internet” as illustrative of his new reasoning.

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The Quill majority expressed concern that without the physical presence rule “a state tax might unduly burden interstate commerce” by subjecting retailers to tax­ collection obligations in thousands of different taxing jurisdictions. Id., at 313, n. 6. But the administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State.

Ah, these kids, with their modern “Internet technology,” they’re always making things obsolete.

Quill was decided in 1992 and, you know, Kennedy was there in 1992. He concurred in the judgment! That means law nerds were treated to the delightful experience of reading Kennedy argue against Kennedy:

Three Justices based their decision to uphold the physical presence rule on stare decisis alone. Id., at 320 (Scalia, J., joined by KENNEDY and THOMAS, JJ., concurring in part and concurring in judgment). Dissenting in relevant part, Justice White argued that “there is no relationship between the physical-presence/nexus rule the Court retains and Commerce Clause considerations that allegedly justify it.” Id., at 327 (opinion concurring in part and dissenting in part).

He’s saying that he only upheld Quill because of prior precedent, and now he’s overturning the prior precedent of Quill.

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I’d poke more fun at the flip flop, but look, I was also around in 1992 and I can tell you that “online shopping” wasn’t “a thing” back then. The world has changed, and the law must change along with it. Kennedy spends a lot of time talking about how Quill was wrongly decided at the time, because it’s not cool for Supreme Court justices to just admit “the game done changed.”

But once the Court stops gazing deeply into the navel of its past horrors, the decision is incredibly straightforward:

Wayfair offers to sell a vast selection of furnishings. Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that “‘[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.’”… What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments.

I know that many progressives view all sales taxes as regressive taxes on the poor. They are. I get that.

But it’s undeniable that sales taxes represent a key source of revenue for state governments starved for funding. And it’s undeniable that denying states that revenue stream, simply because an online store cleverly keeps its physical stuff in Florida or Delaware or whatever, is dumb. It was dumb when we were talking about mail-order catalogs in Quill, it’s dumb now when we’re talking about Wayfair and Amazon.

And don’t even get me started on the unfair competitive advantage an online seller gets compared to a brick-and-mortar store that has to pay taxes in the community where it is located. As Kennedy points out, Wayfair was PROMOTING its ability to undercut local stores with its sales tax loophole. It’s a system that had to stop. It’s the goddamn future already.

In dissent, Roberts passionately wrote about the plight of the economically disadvantaged shopper whose wages have stagnated and can’t bear even a marginal cost increase to their core purchases. … Then he sprouted wings, danced a tarantella on the head of a pin, then opened Bifrost to allow a Norse army access to the Capitol.

Obviously, Roberts did none of these things. Instead:

The Court argues in favor of overturning that decision because the “Internet’s prevalence and power have changed the dynamics of the national economy.” Ante, at 18. But that is the very reason I oppose discarding the physical presence rule. Ecommerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.

I’m not really a fan of stare decisis, so I’m not a fan of arguments defending it. Roberts says that Commerce Clause precedent deserved “heightened” stare decisis, which reminds me of JoAnn Galloway stating she “strenuously objects.”

What Roberts really wants is what he always wants, to make things easier for big businesses. Collecting taxes makes it marginally more difficult for them, and so, Roberts wants the Court to leave it alone.

I’m just happy that our state tax authority now loosely resembles the world that we actually live in. Physical contacts were a fine limitation before, like, roads. But just because I can buy a unicorn from a company based on Tesla that’s orbiting in space, doesn’t mean I should be able to escape paying my share of the New York sales tax. (Full disclosure: I live in New York, almost everybody has physical contacts here. Over a year, this decision probably costs me 12 cents.)

South Dakota v. Wayfair [Supreme Court]

Elie Mystal is the Executive Editor of Above the Law and the Legal Editor for More Perfect. He can be reached @ElieNYC on Twitter, or at elie@abovethelaw.com. He will resist.

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