Tax Foundation Brief in Wayfair Online Sales Tax Case: SCOTUS Should Set Meaningful Limits on State Taxing Power

On April 17, 2018, the U.S. Supreme Court will hear arguments in South Dakota v. WayfairSouth Dakota v. Wayfair was a 2018 U.S. Supreme Court decision eliminating the requirement that a seller have physical presence in the taxing state to be able to collect and remit sales taxes to that state. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions. , Inc., on the constitutionality of a South Dakota law requiring collection of the state’s sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. by internet vendors with at least 200 transactions or $100,000 in sales to South Dakota residents. In November 2017, the Tax Foundation had filed a friend-of-the-court brief asking the Court to take the case, and the Court agreed to do so on January 12, 2018.

The U.S. Constitution’s Commerce Clause has been interpreted to forbid state taxation that excessively burdens or discriminates against interstate commerce. Petitioner South Dakota seeks to reverse the Quill decision of 1992, which held that states cannot force sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. collection by vendors who do not have personnel or property in the state (the “physical presence” standard). Respondents Wayfair, Inc., et al., seek to retain the Quill decision.

On March 5, 2018, the Tax Foundation filed a friend-of-the-court brief in the case, in support of neither party. Our brief argues that the South Dakota law is constitutional, but Quill need not be overturned. The physical presence standard from that case was adopted as a proxy for what truly matters, constitutionally: state taxes cannot burden interstate commerce, cannot discriminate against interstate commerce, and cannot tax more than their fair share of interstate commerce. Our brief cites dozens of past cases, as well as contemporaneous statements by the Founders, to support this reading of the Commerce Clause. In the areas of income and business taxes, physical presence has actually led to more extensive state taxation of interstate commerce, with taxes on businesses and business travelers with only transient or incidental personnel in the state. Various congressional proposals seek to pare back this assertion of state tax authority.

Many current state enactments, including “click-through nexus” laws in 22 states (nexus based on referral links from in-state websites), “notice-and-reporting” laws in 10 states (reporting burdens on entities with no nexus), economic nexus laws in three states (disregarding any nexus limits), and proposals for “cookie taxes” (nexus based on placing website cookies on in-state computers) violate this standard. But the South Dakota law is constitutional because the state minimizes the burden of its sales tax collection to the extent practicable, by:

• Adhering to interstate standards of sales tax administration;
• Requiring uniformity between state and local sales tax bases;
• Minimizing number of local sales tax rates, which in South Dakota must be either 1 or 2 percent;
• Taxing virtually all final retail transactions under its sales and use tax, without arbitrary exemptions or confusing special tax rates;
• Adopting a meaningful de minimis threshold likely to exclude interstate activity where state burdens exceed state benefits, and
• Barring retroactive collection.

In addition, the state does not discriminate against interstate commerce, subjecting out-of-state retailers to the same taxes paid by in-state retailers, and the statute’s sales and use tax applies only to South Dakota’s fair apportioned share of interstate commerce, purchases made by South Dakota residents not taxed by any other state.

Already, a majority of states have disregarded constitutional limits on their sales tax powers. Absent Court or congressional action, this trend will continue, creating the scenario that the Commerce Clause sought to avoid: states subjecting interstate commerce to death by a thousand cuts. We hope the Court resolves this almost universal lack of clarity about the proper scope of state sales taxation of out-of-state entities, with meaningful limits of state taxation of interstate commerce.

The case is South Dakota v. Wayfair, Inc., et al., No. 17-494.

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