Most Supreme Court rulings are a bigger deal for legal nerds than they are for everyday Americans, but one decision this month will stand out from the crowd. In the case of South Dakota v. Wayfair, the Supreme Court could upend the vibrant world of Internet retail and empower states to impose higher tax burdens, both online and off-. That might lead to higher prices, fewer choices, and a weakening of the Internet ecosystem that Americans benefit from so richly.
This landmark case tests an important precept that underpins much of state tax law: that a business cannot be forced to collect a state’s sales tax unless it is physically located inside that state’s borders. Dating back to a 1992 Supreme Court decision, Quill v. North Dakota, this common-sense standard applies to every business, whether brick-and-mortar or online. This protection prevents aggressive states from heaping tax obligations (including burdensome audits) on out-of-state online retailers who have no political recourse to fight back.
State governments, backed by oodles of lobbying cash from big retailers that would like to hamper their smaller competitors, have waged legislative war against this limitation for two decades. At the federal level, the states have attempted to convince Congress to grant them the power to tax interstate commerce. In a rare display of wisdom, Congress has declined to acquiesce to the lobbying coalition of state governments and big retailers seeking an advantage over smaller competitors.
Some state governments have now taken matters into their own hands. South Dakota passed a law granting itself the power to tax out-of-state businesses, in direct contravention to the 1992 Quill precedent and the will of Congress. The case testing the law’s constitutionality quickly made its way to the highest court in the land, which is expected to release its ruling in the coming weeks.
If the Supreme Court undermines the Quill standard and validates South Dakota’s law, it could lead to chaos in online retail. Businesses that operated in accordance with the law by collecting tax in states where they’re physically present — like the case’s defendant Wayfair or catalog retailers like L.L. Bean, but also thousands of other smaller Internet retailers — would find the rug pulled out from under them, potentially exposing them to the tax and audit power of 45 states with sales taxes.
That could mean massive accounting and compliance costs for online sellers. Having to comply with as many as 12,000 taxing jurisdictions nationwide, after all, is an expensive prospect that would force many businesses to staff up with accountants and lawyers.
It could even lead to some businesses shutting down sales entirely to certain states, effectively “blacking out” their websites to residents. For example, Ohio and Massachusetts have pioneered a scheme in which they assert their tax power over any business with a website that utilizes browser cookies. If the Supreme Court’s ruling allows this approach, some out-of-state retailers might decide that it’s better to prevent residents from accessing their sites altogether rather than open themselves up to tax and audit enforcement actions. It’s chilling, particularly given that the Internet is meant to be a vehicle for connection and expression. And states might not stop at Internet sales, as some might look to also increase their taxing power over individual and business income from out-of-state entities as well.
It doesn’t have to be this way, of course. Instead of validating South Dakota’s law and potentially unleashing a torrent of disruption to e-commerce, the Supreme Court could instead take the course of strongly upholding its previous decision in Quill. That would disappoint states looking to expand their tax reach, but it would preserve common sense and encourage stability in Internet retail.
The Internet is vast, powerful, and borderless. We shouldn’t allow it to become a vehicle for state tax authority to become similarly vast, powerful, and borderless. If the Supreme Court overturns decades of precedent for Internet sales taxes, then small businesses, online consumers, and the economy as a whole will suffer the consequences.
Andrew Moylan (@amoylan) is executive vice president of National Taxpayers Union Foundation and leads the organization’s Interstate Commerce Initiative.
