The Supreme Court
’92 decision shields online buying from state, local taxes
is urged to revisit a recent ruling on internet sales.
WASHINGTON — The last time the Supreme Court took a hard look at how to impose sales taxes on home shopping, it was the era of mail-order catalogs — “before Amazon was even selling books out of Jeff Bezos’ garage,” lawyers recently told the justices.
In 1992, the high court upheld a constitutional rule that barred states from requiring mail-order sellers to collect sales taxes if the vendors had no “physical presence” in that state.
The rule was immediately seen by some as legally suspect. And with the explosion of internet sales over the decades, it costs state and local governments tens of billions of dollars in lost tax revenues.
Now lawyers for 35 states are urging the high court to overturn the physical-presence rule as outdated and unfair to them as well as to the struggling “brick and mortar” retailers who must collect sales taxes.
They have on their side a crucial ally: Associate Justice Anthony Kennedy. Two years ago, he said the court should re-examine the 1992 Quill Corp. v. North Dakota decision as soon as possible. The ruling was “questionable” at the time, he said, and it is “now inflicting extreme harm and unfairness on the states.”
“In view of the dramatic technological and social changes that have taken place in our increasingly interconnected economy,” he wrote, “it is unwise to delay any longer a reconsideration of the court’s holding in Quill.”
That opportunity came before the justices Friday when they met to review dozens of pending appeals, perhaps including South Dakota v. Wayfair, Overstock and Newegg, which calls for scrapping the “physical presence” rule.
“If Quill was a ‘questionable’ decision in 1992, it is a senseless decision in 2018,” said Lisa Soronen, executive director of the State and Local Legal Center in Washington. “Congress has had over two decades to correct Quill but it has failed to do so.”
She was referring to the court’s parting comment in its 1992 opinion that Congress “may be better qualified” to set a national rule on collecting sales taxes from out-of-state sellers.
Since then, Congress has tried but failed to agree on a new law. The Senate approved the Marketplace Fairness Act in 2013 to authorize states to collect sales taxes from out-ofstate sellers, but the House balked. Republican leaders have been wary of imposing more taxes on consumers and new burdens on online businesses.
Supporters of small webbased businesses argue that Congress should not foist on them the duty to collect taxes that are owed to more than 12,000 city and county jurisdictions across the U.S.
The Supreme Court cited this burden in 1992, but state lawyers now say special software makes it easy to assess proper taxes based on a buyer’s ZIP Code.
The deadlock in Congress has renewed pressure on the court to rethink its rules for deciding interstate tax disputes.
The Constitution does not directly give the Supreme Court the power to police limits on interstate commerce. It says “Congress shall have the power … to regulate commerce with foreign nations and among the several states.” But for much of the court’s history, the justices have said they may strike down state laws that restrict interstate commerce, including taxes on shipments that are unfair or too heavy. The justices refer to this doctrine — sometimes sarcastically — as the “dormant” or “negative” commerce clause because it gives the court power it was never explicitly granted.
Justice Clarence Thomas, who like Kennedy concurred in the outcome in the 1992 decision but did not sign on to the court’s opinion, has been a steady skeptic of the “negative” commerce clause. It “has no basis in the text of the Constitution and makes little sense,” he wrote.
State officials are encouraged that the court may be ready to change course.
In November, the Government Accountability Office estimated state and local governments are collecting 75 to 80 percent of the taxes they are owed from “remote sellers.” It projected the annual loss for those governments as between $8.5 billion and $13.4 billion.
In November, 15 friend-of-the-court briefs were filed urging the justices to hear the South Dakota case. They came from groups that represent retailers, wholesalers and shopping centers as well as the National Governors Association, law professors and economists.
Last month, several antitax groups joined Internet sellers in urging the court to turn away the appeal.
The justices will meet several times this month to vote on pending appeals.