White House wades into SCOTUS online sales tax case

In fairly short order, the Supreme Court is going to begin hearing arguments in the case of South Dakota v. Wayfair Inc. This case is being closely watched around the country because of the potential impact it will have on consumers as well as retailers, both traditional and online. The state of South Dakota is asking the Supremes to overrule their 1992 decision in Quill Corp. v. North Dakota, which held that states could not force online retailers to collect sales tax in other states where the company didn’t have a physical presence.

Now the White House has weighed in on the side of the states. The administration filed a friend of the court brief urging the justices to take a fresh look, placing the current sales situation in context while considering all the changes which have taken place in the retail space over the past 26 years. (Wall Street Journal, subscription required)

The Trump administration on Monday urged the Supreme Court to expand states’ authority to collect sales tax on internet transactions, joining a chorus of state officials seeking to overrule a 1992 precedent exempting many online retailers from having to add taxes to a consumer’s final price.

In 1992, the justices “did not and could not anticipate the development of modern e-commerce,” Solicitor General Noel Francisco wrote in a friend-of the-court brief. “In light of internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers.”

South Dakota is leading a charge to overrule 1992 case, Quill Corp. v. North Dakota, with arguments scheduled next month. Some 35 states and the District of Columbia, as well as organizations representing retailers from booksellers to shopping malls, have filed briefs supporting South Dakota’s position. Catalog mailers and online retailers have opposed the state, arguing that it is too burdensome for many businesses to comply with 50 or more separate state taxing regimes.

The 1992 case held that constitutional provisions assigning Congress authority over interstate commerce prohibited states from requiring out-of-state retailers to collect sales taxes without congressional assent. While consumers remain obligated to pay sales tax, few know of this duty and fewer still voluntarily comply, robbing state treasuries of billions of dollars, officials say.

This drags us back into a long-running discussion we’ve had about the Marketplace Fairness Act and whether or not Congress should act on this subject before the courts can get around to it. There are two ways to view this which have always left me a bit conflicted, but it’s not hard to see the merit in each side.

Arguing against any sort of change from the status quo is quick and easy. First of all, most people don’t want to pay even more taxes or to have the cost of all of their online purchases go up. But even more than that, when the courts originally ruled in Quill it was pointed out that the Constitution vests in Congress the power to regulate interstate commerce. As you should know by now, the interstate commerce clause is probably the most badly abused, archaic clause in our founding documents. It’s the cheap excuse that Congress uses to pass all manner of federal laws, doing verbal backflips to dream up ways to portray any given scenario as having an impact on commerce between the states.

And considering how the Founders actually pictured the country operating (with the various states being highly independent to the point of possibly conducting trade wars against one another), the clause became obsolete almost immediately. But in the era of online sales, this may be that rare unicorn of a case where the interstate commerce clause actually applies.

But we can have some sympathy for the other side of the argument as well. Brick and mortar retailers have a legitimate gripe in saying that their competitors are able to sell cheaper by virtue of being given a free pass in states where a sales tax is charged while they have to impose the tax. It’s also true that consumers are supposed to be paying the tax on such transactions, but basically, nobody does.

Will Trump’s friend of the court brief have any impact on the court’s decision? Color me skeptical. They get piles of those briefs fed to them in every case they hear and even if they bother reading them I highly doubt there’s any critical information within that they didn’t already know if they planned on taking it into account. But it also leaves room for Congress to reconsider the MFA. If Quill is overturned with no legislative action taken, every single retailer, including the smallest, could be hit with this requirement. Intervention by Congress could at least carve out some space for small businesses and start-ups. It’s something to consider anyway.