This week, the South Dakota Supreme Court dealt a blow to states’ winner-take-all, bet-the-house gambit to get the U.S. Supreme Court to allow states to regulate interstate commerce by imposing tax collection obligations on out-of-state retailers.
States have long sought to shift their burden to collect state sales tax to out-of-state retailers. Fortunately, Supreme Court precedent stands in the way. 25 years ago, the Supreme Court foresaw the evils that could and would result if states had carte blanche regulation over non-resident businesses.
In the tax collection area alone, states and localities have created an unharmonized mishmash of over 10,000 sets of tax regulations. Imagine that track record applied to other areas of cross-border commerce. That’s the future states envision!
In deciding Quill v. North Dakota, the Supreme Court prohibited the imposition of extraterritorial state tax collection obligations on businesses with no physical presence the taxing state.
That makes sense. If you have physical presence in a state, you have a say in local government and presumptively you get resident benefits, too. So why not the resident obligations? Of course, the opposite is true where there is no physical presence: you have no say, no benefits, and so no tax collecting obligations.
Despite the correctness of Quill, states need resolution to the problem of how to collect sales tax. What is there to do?
The Quill decision rests the solution on the power of Congress – not the individual states – to regulate interstate commerce. For years, responsible online retailers have sought a Congressional compromise bill that would fairly allow states reasonable tax collection powers over out-of-state businesses. Unfortunately, states have not come to the table.
Instead, states continue spading up a legal dirt pile, passing unconstitutional state laws, all necessitating taxpayer-funded litigation, in the hopes that with enough dust in the air, the Supreme Court’s will become vision-impaired. It won’t work.
Legal dust is an occupational hazard of the Supreme Court, and its members have pretty good goggles. In fact, many times the Supreme Court has flat out refused to revisit Quill. The message is clear: Congress needs to dust off its interstate commerce powers and solve the problem. I agree!
Congress is open to that with some viable legislative drafts. Unfortunately, it seems there is no end to states’ faith in lost causes. The South Dakota gambit is only the latest.
In early 2015, states rallied behind a lone concurrence Justice Kennedy filed, in which he wrote sympathetically that maybe it was time to revisit Quill because of changed times and internet commerce growth. Kennedy made the best case he could for opening the Pandora’s Box to state cross-border regulation, but since no other justice joined Kennedy, it is fair to assume the other seven justices disagreed. That’s a math lesson states seemed to have missed, ignored or spun.
Next, taxing states put their collective shoulders to the wheel of this South Dakota law directly challenging Quill – actually begging to lose to set up an appeal. Well, lose they have. And now they are jigging up and down about their chances at the Supreme Court, saying their loss today puts the matter squarely in the hands of the Supreme Court—as if that were something new.
Those hands have dropped the issue more often than they have taken it up. As lately as in the 2015 case where Justice Kennedy’s urged them on, they declined. In 2013, the Supreme Court was squarely presented the issue head on when asked to review New York’s “Quill-kill” law. Same result: the Supreme Court declined.
To seasoned observers, refusal to take previous Quill rethink opportunities is a clear sign the Supreme Court has said all it has to say on the subject. Most believe it is up to Congress to act.
Congressional action will take cooperation and compromise. Overstock.com and many national retailers actively support fair and workable national legislation. Congressional sponsors have repeatedly invited states to come to the table to find a solution.
Could states win the extra-territorial regulation lottery and see the Supreme Court hand them the keys to interstate commerce regulation? Unlikely, but it could happen, I suppose.
Solving for tax fairness would happen with more certainty – and sooner – if the states would just agree to fill the seats now empty at the Congressional compromise table.
Jonathan Johnson is on the board of directors of Utah-based Overstock.com and a former candidate for governor in Utah.