Court OKs State Internet Sales Tax, Overturns "Physical Presence" Requirement

Steven D. Schwinn, John Marshall Law School

The Supreme Court today, in South Dakota v. Wayfair, upheld South Dakota's sales tax on out-of-state sellers against a Commerce Clause (or, more precisely, Dormant Commerce Clause) challenge. The ruling opens the door for states to impose sales taxes on internet sellers who lack a physical presence in the state. The ruling also overturned a pair of cases requiring a seller's "physical presence" in a state before the state could tax it.

Justice Kennedy wrote for the Court, joined by Justices Thomas, Ginsburg, Alito, and Gorsuch.

The Court upheld South Dakota's sales tax on out-of-state sellers "as if the seller had a physical presence in the State." That qualifier was significant, because the Supreme Court had previously held in National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota that a state can only impose a sales tax on a business that has a physical presence within the state. South Dakota's tax thus put the brick-and-mortar requirement in Bellas Hess and Quill squarely before the Court.

The Court struck it, and overturned those cases. The Court said that "Quill is flawed on its own terms." First, it wasn't a necessary interpretation of precedent; next, it creates market distortions by creating an incentive to avoid physical presence; and finally, it "imposes the sort of arbitrary, formalistic distinction that the Court's modern Commerce Clause precedents disavow . . . ." Moreover, internet commerce has changed things since the Court created the brick-and-mortar rule. And finally, the rule "is also an extraordinary imposition by the Judiciary on States' authority to collect taxes and perform critical public functions."

Justice Thomas concurred, arguing that "this Court's entire negative Commerce Clause jurisprudence" "can no longer be rationally justified."

Justice Gorsuch also concurred, similarly arguing "[w]hether and how much of [the Court's Dormant Commerce Clause jurisprudence] can be squared with the text of the Commerce Clause . . . are questions for another day."

Chief Justice Roberts dissented, joined by Justices Breyer, Sotomayor, and Kagan. He argued that this is a matter for Congress, given the stakes for the economy:

I agree that Bellas Hess was wrongly decided . . . . The Court argues in favor of overturning that decision because the "Internet's prevalence and power have changed the dynamics of the national economy." But that is the very reason I oppose discarding the physical-presence rule. E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.