SCOTUS: Get ready to pay sales tax on the Internet

State legislatures got an early Christmas gift today from the Supreme Court, but consumers might see the justices collectively as the Grinch. Overturning decades of precedent, a narrow 5-4 majority declared an end to the brick-and-mortar requirement of imposing sales taxes on internet purchases. The ruling also boosts traditional retail outlets by putting them on a fair playing field with giants such as Amazon:

The justices broke with 50 years’ worth of legal rulings that barred the states from imposing sales taxes on most of the purchases their residents make from out-of-state retailers.

The decision was a victory for South Dakota, which asked the court to uphold its recently passed law imposing an Internet sales tax. ” …

In 1967, the Supreme Court ruled that states could not force mail-order catalog companies to collect sales taxes unless a buyer lived in a state where the company had a physical presence — a retail store, a headquarters, or a distribution center, for example. The court reasoned then that the volume of mail order business was minor compared to in-store sales and that catalog companies would face too big a burden in having to figure out the correct sales tax, given widely different rates around the country.

When one thinks about that reasoning in National Bella Hess (1967) and later in Quill (1992), it seems a little thin anyway. It’s an argument for an unequal application of the law based on circumstance. That is territory best left up to Congress, which does have the legitimate constitutional authority to regulate interstate commerce. (In fact, this is a much more direct instance of interstate commerce than many other issues which Congress regulates.) Just because the level of commerce is “minor” doesn’t make it any less of an interstate issue, and divining nuanced interest in crafting laws is an Article I power, not an Article III jurisdiction.

Small wonder, then, that Justice Anthony Kennedy saw fit to dispense with the stare decisis argument. He argued specifically that National Bella Hess and Quill were in fact erroneously decided in the first place:

“Although we approach the reconsideration of our decisions with the utmost caution, stare decisis is not an inexorable command.” Pearson v. Callahan, 555 U. S. 223, 233 (2009) (quoting State Oil Co. v. Khan, 522 U. S. 3, 20 (1997); alterations and internal quotation marks omitted). Here, stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.

If it becomes apparent that the Court’s Commerce Clause decisions prohibit the States from exercising their lawful sovereign powers in our federal system, the Court should be vigilant in correcting the error. While it can be conceded that Congress has the authority to change the physical presence rule, Congress cannot change the constitutional default rule. It is inconsistent with the Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation. Courts have acted as the front line of review in this limited sphere; and hence it is important that their principles be accurate and logical, whether or not Congress can or will act in response. It is currently the Court, and not Congress, that is limiting the lawful prerogatives of the States.

Further, the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the “far-reaching systemic and structural changes in the economy” and “many other societal dimensions” caused by the Cyber Age. Direct Marketing, 575 U. S., at ___ (KENNEDY, J., concurring) (slip op., at 3). Though Quill was wrong on its own terms when it was decided in 1992, since then the Internet revolution has made its earlier error all the more egregious and harmful.

The Quill Court did not have before it the present realities of the interstate marketplace. In 1992, less than 2 percent of Americans had Internet access. See Brief for Retail Litigation Center, Inc., et al. as Amici Curiae 11, and n. 10. Today that number is about 89 percent. Ibid., and n. 11. When it decided Quill, the Court could not have envisioned a world in which the world’s largest retailer would be a remote seller, S. Li, Amazon Overtakes Wal-Mart as Biggest Retailer, L. A. Times, July 24, 2015, http://www.­ story.html (all Internet materials as last visited June 18, 2018).

It shouldn’t have had to consider that. That was a question for Congress in Quill, not the Supreme Court. However, Chief Justice John Roberts accuses Kennedy of making the same mistake in today’s ruling:

In Quill, this Court emphasized that the decision to hew to the physical-presence rule on stare decisis grounds was “made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.” 504 U. S., at 318 (footnote omitted). Even assuming we had gone astray in Bellas Hess, the “very fact” of Congress’s superior authority in this realm “g[a]ve us pause and counsel[ed] withholding our hand.” Quill, 504 U. S., at 318 (alterations omitted). We postulated that “the better part of both wisdom and valor [may be] to respect the judgment of the other branches of the Government.” Id., at 319; see id., at 320 (Scalia, J., concurring in part and concurring in judgment) (recognizing that stare decisis has “special force” in the dormant Commerce Clause context due to Congress’s “final say over regulation of interstate commerce”). The Court thus left it to Congress “to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.” Id., at 318 (majority opinion)

This is neither the first, nor the second, but the third time this Court has been asked whether a State may obligate sellers with no physical presence within its borders to collect tax on sales to residents. Whatever salience the adage “third time’s a charm” has in daily life, it is a poor guide to Supreme Court decisionmaking. If stare decisis applied with special force in Quill, it should be an even greater impediment to overruling precedent now, particularly since this Court in Quill “tossed [the ball] into Congress’s court, for acceptance or not as that branch elects.”

And Roberts argues that this will now create compliance costs which, far from increasing fair competition, might wipe out small retailers on the Internet altogether:

The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even “micro” businesses to potential buyers across the Nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale. See Sales Taxes Report 22 (indicating that “costs will likely increase the most for businesses that do not have established legal teams, software systems, or outside counsel to assist with compliance related questions”). And the software said to facilitate compliance is still in its infancy, and its capabilities and expense are subject to debate. See Etsy Brief 17–19 (describing the inadequacies of such software); eBay Brief 8–12 (same); Sales Taxes Report 16–20 (concluding that businesses will incur “high” compliance costs). The Court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets.

The strangest part about this is that both men are mostly correct. What we have here are a series of bad decisions and the inevitable skewed consequences that result from them. The court shouldn’t have interfered in National Bella Hess, which created a problem that may not have been foreseeable in 1967, but the issue probably could have been foreseen by 1992 when upheld in Quill. Now, 26 years after the court’s second failure to stay within its boundaries, Kennedy wants to unwind those decisions, but doing so will disrupt the marketplace far greater than in either of the other two points in time had the Supreme Court not intervened where it didn’t belong in the first place.

There’s a lesson to be learned here about judicial modesty and deference to the legislature. Few will probably learn it, but it’s there.