In a 5-4 decision, the Supreme Court has found in favor of South Dakota in the South Dakota v. Wayfair case. Undermining the popular “team” construct of the court, the Justices in the majority were Kennedy, Gorsuch, Ginsberg, Thomas and Alito, while the Justices in the minority were Sotomayor, Roberts, Kagan and Breyer.
The Justices found that prior cases, in particular Quill Corp v. North Dakota and National Bellas Hess Inc. v. Illinois Dept. of Revenue, had set a requirement of physical presence for the collection of sales taxes which placed an undue burden on the state. Customers making purchases were required to report those purchases and render appropriate taxes, but because of the low ability to track and enforce such purchases, remittances were rarely made. Specifically, from the decision:
Consumer compliance rates are notoriously low, however, and it is estimated that Bellas Hess and Quill cause South Dakota to lose between $48 and $58 million annually. Concerned about the erosion of its sales tax base and corresponding loss of critical funding for state and local services, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.”
The Quill decision had been rendered in part because of the limitations on due process for an out-of-state seller. This decision argues that an out-of-state seller may have the necessary access to due process, and because of the size of the companies singled out by the South Dakota law (the companies must do either $100,000 of business in that state or conduct at least 200 independent transactions in the state, annually, to be liable for sales tax collection) that they do, in fact, have requisite due process access.
The decision is also rendered in part on dangerously weak grounds:
The physical presence rule has long been criticized as giving out-of-state sellers an advantage. Each year, it becomes further removed from economic reality and results in significant revenue losses to the States.
This is grossly incorrect. It should not have been part of the decision, and its inclusion is a dangerous signal that the court is willing to base its decisions at least partly on economic unreality vice legal framework.
Out-of-state sellers do not have an advantage in sales. Locally present stores have a massive advantage in sales, and hard data associated with sales reflects this. People prefer to purchase things and have them immediately, and they prefer to purchase them with a measure of certainty against returns. Amazon, for all that it is the largest marketplace available, has focused much of its attention into getting local presences to enable rapid delivery to match Wal-Mart’s ship-to-store capability.
Their return rate is astonishingly high. What has enabled them to survive, and only after years of losses to eventually turn a profit, was the lack of sales taxes providing not an advantage but a mitigator versus the inherent advantages of local stores. Their actual business model relied on massive sales at low profit margins and developing a consumer base that grew used to delayed gratification.
The myth of online sellers having an advantage is merely that – a myth. But tax revenue is decreased, not because online sellers have an advantage but because the marketplace has expanded for the buyer. Faced with more options, options beyond the local ones are sometimes chosen. Tax revenue decreases not as a function of buying a bottle of Dial hand soap on Amazon vs. the Stop-n-shop, but rather as a function of the purchaser being able to purchase “Strawberry-scented Aesop hand soap” from someone’s native Australia that is not carried in the local Stop-n-shop.
That some large retailers have faced problems because of this is not because suddenly they’re being outsold; it’s because their business models depended on maintaining a profit level expected from a given population base, and that population base now has more choices. An analogue in the book business are e-books. After an initial surge into the market, the sales of e-books have plateaued around 30% of sales. As book sales have also increased, brick and mortar retailers have failed… not because more people were buying e-books than regular books, but because their business models could not handle a 20%-35% reduction in their direct sales. Even a small decline can be enough to sink a business, because most businesses are designed to make as a profit only a very tiny percentage of their stock value.
The Court has made a decision based, at least partly, on misinformation. That in no way undermines the earlier point about the availability of due process, however.Ultimately, the result of this decision is that states will be able to enact laws governing the collection of sales tax from out-of-state sellers. Some may use the same limits as South Dakota; some may use more less restrictive guidelines. If the guidelines reduce the collection levels enough, the availability of due process may have to be revisited; it’s difficult to claim that a teenager making bath bombs in Florida and selling three per month on Etsy has the financial and social capability to have representation at a point of sale in Hawaii.
The driving motivation for this law was to get more money for the state. Very rarely do governments ask to do with less income. It is reasonable to expect the guidelines to go very low indeed.
The decision is comprehensive and provides an analysis of the development of Commerce clause interpretations. It is not in any way a flighty decision, and my rebuttal of the inspirational point behind some of the reasoning should not be taken to indicate that it is not a decision which was methodically explained and supported by established case law. That said, the arguments on each side can be summarized:
Kennedy : The states need money because government needs to spend. Retailers from out of state are lowering in-state sales. States have to get the money from somewhere, let it be from out-of-state businesses.
Roberts : E-Commerce is growing and thriving. Taking away one of the few benefits it has risks damaging or even killing that growth. It’s commerce, let Congress make commerce decisions.
The notion of limiting the continued, now-entrenched growth of the power of the Commerce clause did not appear to be a consideration in the decision.