Wayfair, You've Got to Charge Tax on Me

Oh, these are my girls, hello girls

Hello, Max, nice outfit

There are many different ways we pay what we owe

Ladies if you'll form a lovely tableau

Income, property, sales, utility, candy bars in my show

Licenses for dogs and cats, and that's not all you know

Out of almost every dollar a person can make

City, State and Federal governments take . . .

Take what?

What they think is fair you giving your share

Now and then there's a break

~Tax Man Max

School House Rock

Back about 10-15 years ago, when the Internet was young and online shopping was new, it didn't take long for people to realize that if you bought online, you wouldn't be charged sales tax. By the same token, state revenue departments realized that goods that were purchased from out-of-state vendors and not taxed affected the states' ability to raise money for state services. 

Lawyers who specialize in state taxation have been debating whether an out-of-state seller can be held responsible for collecting sales taxes on purchases made within a state for years. It really wasn't a matter of if the Supreme Court would take on this issue, but when.

The U.S. Supreme Court and the Constitution

For a case to get to the U.S. Supreme Court, it must have already been considered by lower courts. Lower courts may include Federal Courts of Appeal or State Supreme Courts. That's an over-simplification, but it works for our purposes. 

Once the parties have gone through the required lower courts, they may file a petition for writ of certiorari with the U.S. Supreme Court. Don't worry about the Latin, just know that the losing party asks the U.S. Supreme Court to consider the case.

The U.S. Supreme Court is the final authority in matters involving interpretation of the U.S Constitution. In Article I, Section 8, Clause 3, the Constitution grants Congress the power “[t]o regulate Commerce . . . among the several States.”  This is known as the Commerce Clause.

The Commerce Clause has been interpreted over the years to mark the boundaries of a state's authority to regulate interstate commerce. This means that state regulations may not discriminate against interstate commerce, and states may not impose undue burdens on interstate commerce. The Due Process Clause is also in play. Basically, due process requires that the government can't deny an individual the opportunity to have a hearing.

Because the Supreme Court is the final authority on the Constitution, other U.S. courts (whether state or federal) must follow its decisions. The Supreme Court generally must follow its own decisions, but there are occasions when the Supreme Court rules that they got it wrong or that the previous decision doesn't work anymore.

Sales Tax

Before there was online shopping, there was catalog and mail order shopping. The U.S. Supreme Court last considered whether an out-of-state seller is liable for the collection and remittance of state sales tax to the state where the buyer is located in 1992. In that case, Quill Corp. v. North Dakota, the Court held that the key for answering this question depended on whether the seller has a physical presence in the buyer's state. Further, the mere shipment of goods into the buyer's state, following an order from a catalog, did not constitute physical presence. Quill followed a 1967 case, National Bellas Hess, Inc. v. Department of Revenue of Ill.

As I mentioned above, lawyers who specialize in state taxation have been waiting for the Court to accept a case that could revisit the state taxation issue in light of the increase in online shopping. Finally, the Court accepted a case involving online retailers Wayfair, Overstock.com and Newegg Inc.

In South Dakota v. Wayfair, Inc., the Court overruled Quill and National Bellas Hess. The Wayfair  Court found that a retailer could have nexus with a state without having a physical presence. Thus, states can now require online retailers to collect taxes on online purchases, whether or not the retailer has any physical  connection to the state.

What the Wayfair Decision Means

More than most Supreme Court decisions, this ruling will impact just about everyone.

• It "levels the playing field" for brick-and-mortar retailers. In other words, a customer will be charged tax whether they purchase that book from Barnes and Noble or order it from amazon.com. Actually, Amazon is already collecting taxes on online purchases, but the example illustrates my point.
• States will now be able to collect tax from their residents who purchase items online, whether or not the retailer has a store, an office, or any other type of physical presence in the state. States have been scrambling to come up with ways to tax online sales, since they were losing revenue.
• In the short-term, stocks of online retailers, such as Amazon, Etsy, Overstock and Wayfair are also taking a hit, but within a few hours of the decision, stock prices for these companies seem to be creeping up again.
• For companies that use third-party online sellers (like Amazon), the ruling likely will open the door for retailers to be responsible for collecting tax from those third parties, too. This is already required in Washington and Pennsylvania.

Dissent

Justice Kennedy wrote the opinion for the majority. Justices Thomas, Ginsburg, Alito and  Gorsuch joined in the majority opinion. Chief Justice Roberts wrote a dissent, which Justices Breyer, Sotomayor and Kagan joined. However, the dissent didn't disagree with the result as much as they thought it was a matter for Congress to settle.

They say that the only things that are certain are death and taxes. I guess that makes free shipping all the more important!