U.S. Supreme Court invalidates its previous sales tax ruling

The U.S. Supreme Court's decision Thursday that states can collect a sales tax from online retailers upends a tax system and adversely affects small businesses and consumers.

In its 5-4 decision, the court invalidated a pre-online sales ruling it made 26 years ago that said companies must have a physical presence in order for a state to collect a sales tax. That 1992 ruling said the physical presence rule was necessary to stop undue burdens on interstate commerce. Quill Corp. v. North Dakota, 504 U. S. 298.

Observers say the ruling is a win for state revenue sources as well as traditional brick and mortar retailers who compete against online businesses that have been immune to the tax. Meanwhile, consumers and small businesses will suffer.

"Though Quill was wrong on its own terms when it was decided in 1992, since then the Internet revolution has made its earlier error all the more egregious and harmful," wrote Justice Anthony Kennedy on behalf of the majority. South Dakota v. Wayfair Inc. et. al., 17-494.

He was joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Chief Justice John Roberts dissented along with Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

The majority said Quill resulted in arbitrary distinctions.

"For example, a business that maintains a few items of inventory in a small warehouse in a state is required to collect and remit a tax on all of its sales in the state, while a seller with a pervasive Internet presence cannot be subject to the same tax for the sales of the same items," the court ruled. Roberts, in his dissenting opinion, said the matter is for Congress, not the court, to decide.

"The court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago," Roberts wrote, referring to National Bellas Hells Inc. v. Department of Revenue of Ill., 386 U. S. 753, the original high court opinion that said requiring a physical presence is an undue burden.

"The burden will fall disproportionately on small businesses. One vitalizing effect of the Internet has been connecting small, even 'micro' businesses to potential buyers across the nation," wrote Roberts in his dissent. "People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country -- but probably not if they have to figure out the tax due on every sale."

While consumers lose out, the ruling is a significant win for physical retailers, who were at a disadvantage to many online sellers offering lower prices, according to Theodore Seto, who teaches tax law at Loyola Law School.

"Even if two vendors were charging the same price, the Quill decision gave the online vendor an automatic competitive advantage," said Seto, who signed an amicus brief on behalf of the states.

Matt Hunsaker of Baker Botts LLP, who handles state and local tax matters, said taxpayers everywhere will be affected, not just online retailers.

"I don't think the court appreciates what it's done. This whole case is being framed in the paradigm of the Amazons and the Wayfairs of the world but really what they have undone is one of the bedrock principles of taxation," said Hunsaker.

After concerns over dwindling tax revenue, the South Dakota Legislature passed a law mandating out-of-state sales to its residents be subject to the state sales tax "as if the seller had a physical presence in the state."

South Dakota filed suit in state court, seeking a declaration that the new law's requirements are valid. Online retailers sought summary judgment, arguing the law is unconstitutional. The trial court granted the retailers' motion, and it was upheld by the state Supreme Court.

The respondents, Wayfair Inc., Overstock.com Inc. and Newegg Inc., online retailers who have no employees or own any real estate in South Dakota, appealed to the U.S. Supreme Court.

The South Dakota law applies to sellers that annually deliver more than $100,000 of goods or services in the state or are engaged in 200 or more transactions.