Law & the Courts

No Online Taxation without Representation

The Supreme Court should remain unmoved by South Dakota’s crocodile tears.

On April 17 the Supreme Court heard oral arguments in South Dakota v. Wayfair, a case that has the potential to reshape the way products are bought and sold online in the United States. The core issue is whether the Supreme Court should overturn its 1992 decision in Quill Corp. v. North Dakota, which held that states could compel only entities with a physical presence inside the state’s physical borders to collect and remit sales tax. Though some justices had hinted that they would be in favor of the state in the current case, South Dakota’s attorneys may have given up that ground when they revealed just how far-reaching a win for the state would be. From big retail to Etsy knitters, South Dakota wants to tax it.

In 2016, South Dakota passed Senate Bill 106, which sought to collect sales tax from any business that directed more than 200 separate transactions into the state in a year. This directly contravened decades of Supreme Court precedent leading up to the Quill decision. (There is no question that states have a right to impose sales tax when a resident makes a purchase online; the issue in this case is whether and when a state can require an out-of-state vendor to collect that tax.) The law is one of several “kill Quill” bills aimed at overturning precedent that rightly keeps states from regulating conduct outside their borders. South Dakota — and the 41 other states filing in a bipartisan effort to back it up — complain that precedent is making them “miss out” on uncollected sales-tax revenue. What they fail to mention, though, are the tremendous costs that vendors will have to bear if this precedent is overturned, and the constitutional barriers the Founders put up to prevent exactly this sort of behavior by the states.

This lawsuit concerns South Dakota’s attempt to force Wayfair, a Massachusetts company, to collect and remit South Dakota taxes. Wayfair did not own property in South Dakota, was afforded no protection by South Dakota’s police, and received no services from South Dakota’s government. South Dakota’s only justification for forcing a foreign entity to participate in its tax regime is that some of Wayfair’s many customers happen to live there. To allow South Dakota to compel Wayfair’s collection of state taxes raises serious concerns about taxation without representation. If states can directly compel people who live outside state boundaries to adhere to state standards — standards the people had no chance to influence — the concept of statehood itself is undermined.

When Quill was decided in 1992, there were about 6,000 separate state and local tax jurisdictions in the United States. Since selling products through the mail could have exposed an individual in one state to 6,000 separate tax regimes, the Supreme Court decided it was crucial to have a hard and fast rule that states could compel tax collection only from entities with a physical presence in that state. Since then, the problem has only gotten worse. Now small businesses are engaged in more national-scale commerce than ever, and the number of distinct tax regimes has doubled.

If South Dakota wins, it would mean any state could force someone in a foreign state — someone to whom the taxing state owes no duty and provides no protection — to do the state’s work for it. As Justice Stephen Breyer pointed out, this would affect not only Internet behemoths such as but also a hobbyist who “sells mandolins on the internet.” This was confirmed by deputy U.S. solicitor general Malcolm Stewart, who, speaking on South Dakota’s side as an amicus curiae (friend of the court), confirmed that if the Court sides with South Dakota, there will be no minimum threshold for a state to force anyone, anywhere, to collect its sales tax.

The Supreme Court once said that it is a “principle of universal application, recognized in all civilized states, that the [laws] of one state have . . . no force or effect in another.” Quill is the result of decades of developments in tax law respecting the commerce clause and due-process rights of Americans. Due process requires some definite link — some minimum contact — between the state and any person, property, or transaction that a state seeks to tax or regulate.

Due process requires some definite link — some minimum contact — between the state and any person, property, or transaction that a state seeks to tax or regulate.

South Dakota claims to be looking out for “local business,” which is “disadvantaged” by what the state conceives to be big online businesses skirting the system. The reality couldn’t be farther from the truth. The truly big companies, such as Amazon, that made up almost half of American e-commerce sales last year (but only 4 percent of total sales) have a physical presence in almost every state and therefore can constitutionally be subject to tax-collection requirements. Far from protecting mom-and-pop shops from evil big businesses, South Dakota is instead endeavoring to protect “local” shops (or stores with physical presence), such as Best Buy and Walmart, from the likes of eBay sellers, Etsy craftsmen, and other basement operations across the nation that currently do not collect sales tax on most transactions.

Borders have meaning, and a state’s authority has to stop somewhere. The Supreme Court should let states handle their own affairs, but those affairs must be limited to each state’s territorial bounds for our constitutional system to work.


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