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Wayfair Supreme Court Case Could Upend How We Buy and Sell Things Online

Imagine that you live in Texas, and you want to sell some trinkets to a guy in South Dakota. Should South Dakota be able to tax you on that? You’ve never even set foot in South Dakota, and the trinkets are worth about twenty bucks. You’re just a young entrepreneur trying to start a business out of your home. So why should South Dakota get a cut?  

This is exactly the question that the U.S. Supreme Court will decide this year. In April, the court will hear a case, South Dakota v. Wayfair, Corp, that could have a huge impact on people who sell and buy things online. At issue is the necessity of a physical presence to trigger sales tax obligations. That is, does a seller have to have a store, office, or warehouse in a state before that state can force it to calculate, collect, and remit sales taxes to that state? According to the 1992 decision in Quill Corp. v. North Dakota, the current answer is yes.

The standard set in Quill should be upheld for reasons of sound public policy, and more specifically, because the Constitution requires the standard to be upheld unless it is changed by Congress, rather than by individual states. Quill’s physical presence rule is not some pointless anachronism. Rather, it preserves fundamental principles of federalism.

First, it confirms that states are sovereign only to the limits of their own territory and citizens. Second, states must compete for residents and citizens based on the wisdom or folly of their political choices. Third, states may not impose their will on other states. Last, states may only act collectively or collusively through the national government.

The competitive federalism implicit in the U.S. Constitution protects individuals from overreaching states and it protects states from each other, especially when those other states form gangs (or, in academic terminology, cartels).  This is perhaps the most important aspect of federalism and it’s properly supported by requiring physical presence before a state may exercise regulatory or taxing authority over citizens of other states.

For a state to conscript non-residents and non-citizens to perform tax collection duties on interstate commerce involving its residents effectively cartelizes the taxation of such commerce. This leads to precisely the type of self-dealing “cooperation” that the Constitution seeks to guard against.

If such interstate cooperation is indeed in the public interest, the Constitution requires that it be mediated by the national government, either through congressional legislation under the commerce power or through congressional approval of an interstate compact. Until and unless Congress does that, there should be a default rule that constrains a state’s power to its own territory. This can be viewed as a function of the dormant Commerce Clause and such provisions as the Export Import Clause, and the extraterritoriality doctrine; more broadly, it can be viewed as one aspect of structural federalism. Regardless, the baseline rule should remain the territorial constraint imposed by Quill unless altered by Congress

The Quill physical presence rule is often derided for causing “inefficient” taxation, but efficiency is not an exception to the bar on extraterritoriality. In many ways, the Constitution was designed to implement inefficient government. In other words, deliberately slowing down government action is baked into our constitutional cake. If this inefficiency is truly a problem, the federal government can enact national legislation or approve an interstate compact, as mentioned above. But efficiency alone does not trump the Constitution.    

 >> Read more from Jessica Melugin on the Internet sales tax issue here.