The authority of States to impose taxes on remote sellers is an issue that calls up various constitutional principles, including (but not limited to) fundamental questions about federalism, the Due Process Clause, and the Commerce Clause. Last term, in South Dakota v. Wayfair, Inc., the Court was asked yet again whether a seller with no presence in state may be subject to the tax laws of that jurisdiction. The Court first addressed the issue in 1967, in National Bellas Hess v. Department of Revenue. There, the Court held that the Due Process Clause and the Commerce Clause required a “substantial nexus” for a State to tax remote sellers, and that with no “physical presence” in the state there could be no substantial nexus.
The court revisited the issue twenty-five years later in Quill Corp. v. North Dakota and affirmed the physical presence test, relying this time on the Commerce Clause analysis and the impact on interstate commerce. In so holding, the Court maintained that regulation of interstate commerce was best managed by Congress.
The Quill Court noted that the mail order industry had evolved considerably since 1967, but it could not have anticipated the impact the Internet would have on the proliferation of remote sellers. One of the largest, Amazon.com, famously built its business strategy on the physical presence test by establishing itself in low-tax jurisdictions and limiting its physical presence in as many jurisdictions as possible. In the years after Quill, “click & mortar” companies like Amazon preserved a competitive advantage over traditional and smaller retailers that could not manage the thousands of sales tax jurisdictions in the United States.
As eCommerce evolved, however, Amazon changed course and concluded it could best preserve its competitive advantage by using its technology to comply with as many sales tax jurisdictions as necessary to deliver to customers as quickly as possible. This change in position meant that other large online retailers were left to convince Congress that the physical presence test, upon which much of the eCommerce economy had been built, should be codified. Though bills were introduced in many sessions of Congress, none were passed.
Frustrated by the inability to collect revenue in a time of budget shortfalls, States argued that “physical presence” was an obsolete test. South Dakota passed a statute intended to violate that test, which treated entities with either $100,000 in sales or 200 separate transactions as though they were physically present in state. Twenty-six years after the decision in Quill, the Court granted certiorari to Wayfair, Overstock.com and Newegg’s challenge of South Dakota’s law.
The Court in Wayfair overturned Quill, focusing its opinion on the appropriate standard that should be set under its dormant commerce clause jurisprudence. The decision can be seen as an effort by the Court to deal with updating a constitutional standard to comport with technological advances in commerce. However, the decision also reveals something about the Court’s increasingly textualist leanings.
In a short concurring opinion, Justice Clarence Thomas took care to articulate his belief that the dormant commerce clause does not exist, and that all of the Court’s jurisprudence stemming from it should be reviewed. A dissent by Chief Justice John Roberts, while not disagreeing that the physical presence standard was obsolete, emphasized the importance of stare decisis where an entire industry has been built around a particular constitutional test. Roberts, like the Court in Quill, underscored the importance of the issue being studied by Congress, the branch with processes and resources better suited to this type of inquiry.
In the end, the Chief Justice’s call to federalism and attention to the varied duties of the branches of government to regulate increasingly complex aspects of the national economy suggests a deep faith that the current divisions in the electorate and a closely divided Congress can be overcome. Technological developments in commerce will likely test this faith in the years to come.
Natasha Varyani is a Visiting Assistant Professor of Law at New England Law | Boston and the author, most recently, of “Being Present: What a Sales Tax Case Demonstrates About Federalism, the Dormant Commerce Clause and the Direction of Supreme Court Jurisprudence” which will appear in the Boston University Public Interest Law Journal in November, 2018. The paper is currently available on SSRN at https://ssrn.com/abstract=3238178.