WASHINGTON D.C. — Today, the Supreme Court struck down its 1992 Quill decision, which had limited states to collecting taxes from mail order catalog (and later online) retailers unless the retailer had a physical presence in that state sufficient to constitute a “substantial nexus.” Today’s 5-4 decision in South Dakota v. Wayfair does not declare constitutional the law passed in South Dakota, or any other state, requiring online retailers to collect and remit online sales taxes from out-of-state retailers that lack physical presence in-state. Instead, the Supreme Court vacated the South Dakota decision striking down the state’s 2016 law, effectively returning the issue to the trial court for further litigation on other aspects of Commerce Clause that the trial court did not need to consider when it enjoined enforcement of the law based on Quill alone. Chief Justice Roberts dissented, joined by three left-leaning Justices.
“Today’s decision is merely the beginning of years of costly litigation over states’ ability to tax online sales,” said TechFreedom President Berin Szóka. “For the last twenty-six years, the Internet has flourished because of the legal certainty created by Quill. Now, no retailer can know whether it must collect taxes, and smaller retailers face huge challenges. As Chief Justice Roberts notes, the majority ‘breezily disregards the costs that its decision will impose on retailers.’ The majority insists that software will fix the problem of calculating the correct state and local sales tax for every transaction, but with over 10,000 jurisdictions taxing similar products differently, the problem is nightmarishly complicated. The majority acknowledges that this burden might be large enough to make laws like South Dakota’s unconstitutional as applied to some small businesses or startups. Yet the majority offers no guidance as to where to draw that line. South Dakota’s law sets a minimum at 200 in-state transactions — a threshold so low it would sweep in all but the very tiniest of online retailers. Litigation will begin immediately, state-by-state, over how small is too small, the many other Commerce Clause questions not addressed by today’s decision, and whether the Internet Tax Freedom Act of 1998 already codified Quill.”
“There is only one alternative to waiting years for the courts to resolve these questions: federal legislation,” continued Szóka. “The majority invites Congress to resolve these questions, while the Chief Justice repeatedly implores Congress to act, correctly noting that Congress is far more capable of resolving highly fact-dependent policy questions than the courts. Unfortunately, he may also be correct that, ‘by suddenly changing the ground rules, the Court may have waylaid Congress’s consideration of the issue.’ But lawmakers must not wait for the courts. They should reiterate what bipartisan Congressional majorities have said repeatedly by extending ITFA multiple times since 1998: states should not be allowed to burden activity that affects them only incidentally. The very borderlessness that has made the Internet so successful is in jeopardy.”
“If laws like South Dakota’s stand, consumers will pay more, not just in taxes but in compliance fees, legal uncertainty, and reduced competition,” concluded Szóka. “Small retailers can’t simply ‘nerd harder’ to comply. They’d need legal and compliance teams. Thus, a decision that many have lauded as protecting small retailers will actually have the opposite result: protecting the largest online retailers in America from mom-and-pop competition. Those large retailers already have widespread physical presence, such as distribution centers, and thus already collect online sales taxes. This means that state and local governments already collect 80% of the taxes they could without Quill — so cracking down on smaller retailers won’t actually do much to help states balance their books.”
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