Sales tax laws catch up to the internet age

Iam not a Constitutional lawyer, nor a Constitutional scholar. But like TV doctors and lawyers, I get to play act when I write this column. With that caveat, I am then protected against any criticism if I get something wrong.

The Commerce Clause of the Constitution grants powers to the Congress to regulate, among other things, interstate commerce. We should not allow individual states the power to impose undue burdens on commerce between the various states.

To this end the Supreme Court has identified two limits on a state’s ability to regulate interstate commerce. First, the state

may not create regulations that discriminate against interstate commerce. Second, the state may not impose undue burdens on interstate commerce.

In 1992, the Supreme Court used these Commerce Clause limits to hold that a state could not collect sales tax from a seller unless that seller had a physical presence in the state. A physical presence meant either property or employees.

So a seller who simply shipped product into a state from an out-of-state location, and did not maintain either property or workers in the buyer’s state, was protected from the need to collect any sales tax on behalf of the buyer’s state.

The theory was that the lack of physical links to a state, or nexus in sales tax terms, meant that the state would impose an undue burden on the seller if a sales tax liability were assessed. States tried to compensate for this by imposing “use” or “compensating” taxes on their resident buyer,

but those taxes are easily circumvented.

In 1992, NAFTA was signed. John Gotti was sentenced to prison for life. Euro Disney opened in France. Prince Charles and Princess Diana separated. LA erupted in riots following the Rodney King beating. Miley Cyrus was born. And people bought their stuff at physical stores. In fact, the Mall of America, the largest mall in the States, opened outside Minneapolis.

Buying stuff at physical stores and Commerce Clause protections for lack of a physical presence — a perfect marriage. At least in 1992.

In 2018, many people prefer to do their shopping by clicking. My youngest daughter is personally responsible for 46 percent of the internet commerce in the United States. OK, I made that up, but it has to be something like that.

In June, the Supreme Court came into the internet shopping era. It said that the 1992 decision was not right, at least not

in 2018. So they rejected the norm of following judicial precedent.

South Dakota enacted a law in March 2016 that required out-of-state retailers to collect sales tax when selling to a South Dakota resident. This law was not limited to retailers with a physical presence in South Dakota.

The law was premised on the theory that even an out-of-state seller benefited from the economy and infrastructure provided by the state. This was the link that justified imposing a sales tax on those sellers.

South Dakota knew it had to avoid imposing an undue burden on interstate commerce. So its law had a few nice things in it. First, it applied only to sellers

that had either $100,000 or more of in-state sales or 200 or more separate transactions, both measured in either the current or preceding year. This eliminated the little guy from what might be an impermissible burden.

Second, it said the tax could not be collected for years prior to the enactment of the new law. Third, it had a standardized set of rules to avoid creating administrative burdens for sales to different locations, and the state even provided free software to help administer the tax assessment.

The Supreme Court said the era of e-commerce made the physical presence test “removed from economic reality.”

It also, the court said, created a judicially imposed tax shelter for businesses that limit their physical presence but sell into a state.

So states may now collect internet sales taxes? Maybe. Some states have laws like South Dakota and are already collecting tax. Others had laws on the books but must revisit the language to ensure the law is like the South Dakota “no undue burden” law. States thinking about such laws should follow the South Dakota road map.