Supreme Court

More Interesting Supreme Court Line-Ups Today

The Court broke in untraditional ways in making decisions about taxing internet sales and the Appointments Clause

|The Volokh Conspiracy |

The Supreme Court handed down decisions in four argued cases today, including long-awaited decisions in cases concerning whether states may tax out-of-state retailers and the constitutionality of Administrative Law Judges at the Securities & Exchange Commission.

In South Dakota v. Wayfair, the Court concluded 5-4 that the Dormant Commerce Clause does not bar states from taxing out-of-state retailers that sell products to those within the state. In doing so, the Court overturned two long-standing Dormant Commerce Clause precedents: Quill Corp. v. North Dakota and National Bellas Hess Inc v. Department of Revenue. Although the Court split 5-4, it was not along traditional lines. Justice Kennedy wrote for the majority, joined by Justices Thomas, Ginsburg, Alito and Gorsuch. Chief Justice Roberts wrote the dissent, joined by Justices Breyer, Sotomayor, and Kagan.

The other big decision released today, Lucia v. SEC, also produced an unusual line-up. At issue here is whether the SEC's Administrative Law Judges are "Officers" under the Constitution's Appointments Clause. (This matters because at the time of Lucia's case before the SEC, the ALJs had not been appointed in a manner consistent with that clause.) Six justices, led by crossover sensation Justice Elena Kagan, ruled that SEC ALJs are "Officers." Joining Justice Kagan were the Chief Justice, and Justices Kennedy, Thomas, Alito and Gorsuch. Justice Ginsburg and Sotomayor dissented.

Justice Breyer wrote a separate opinion concurring-in-the-judgement in part and dissenting in part. Justice Breyer agreed the ALJ's appointment had been invalid, but based this holding on statutory grounds. Justice Breyer did not want to reach the constitutional issue without also considering whether the Constitution places limits on the removal of SEC ALJs. Interestingly enough, the Solicitor General had argued that the two questions—appointment and removal—should be considered together, and was criticized for taking this position. Justice Breyer, it seems, agreed with the SG on the connection between the two issues.

Today's other two decisions were more traditional affairs, although the federal government was on the losing end in both. The Court split 5-4 along traditional ideological lines in Wisconsin Central Limited v. United States, concluding that (contra the position advanced by the IRS), stocks do not constitute "money renumeration" and are therefore not taxable compensation under the Railroad Retirement Tax Act. And in Pereira v. Sessions, the Court ruled 8-1 that a "notice to appear" at a removal proceeding must include the time and place of the demanded appearance to trigger the "stop-time" rule. Justice Sotomayor wrote for eight justices. Justice Alito dissented alone. Justice Kennedy had an interesting concurrence I'll discuss in another post.

More decisions will be handled down tomorrow. (Cue Rebecca Black.)

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  1. The loki13 rule has been given a real workout this Term.

    1. If a business doesn’t venture into a state, I struggle to understand how the state has jurisdiction over the company. The company is in state A, with low or no sales tax, so Joe Customer, a resident of state B orders goods from the company in state A to take advantage of the lower sales taxes. State B has jurisdiction over Joe Customer, and should turn up on his doorstep to collect any taxes due.

      In other words, the state B taxing authority has exactly the same reach over businesses in other states whether the customers are driving over the border themselves to shop, or or having things shipped.

      You get different results if the company’s employees physically deliver the goods, or perform on-site services like installation. In those cases, the company has come into the state and subjected themselves to the taxing authority of the state.

      I live in a no-sales-tax state, and prefer it that way.

      1. You get different results if the company’s employees physically deliver the goods

        So you’re saying it would be okay for State B to erect customs barriers at state lines and airports, or to demand to inspect the bill of goods to assess tax from the courier services?

        One problem with the existing state of the law is that states were already finding more and more ways to claim that companies technically had physical preferences. Many states did the “do you have an affiliate program?” bit. Probably the most absurd were the ones that claimed “if you put a cookie on Joe Customer’s computer in state B, that’s a physical preference.” The status quo was getting pretty bad already. If the Court was going to uphold Quill, it also needed to rule out a lot of those dodges, not just leave things in place.

        From a taxation perspective, your approach makes the tax more like a corporate tax, as opposed to a sales tax. I’m not a fan of corporate taxes. (If you’re in a no-sales-tax state, it can stay that way.

        The complexity argument is significant; this ruling claims that South Dakota simplified its sales taxes in a number of ways, and suggests that other states with complicated taxes might not pass muster.

        1. “So you’re saying it would be okay for State B to erect customs barriers at state lines and airports, or to demand to inspect the bill of goods to assess tax from the courier services?”

          No. I’m saying if the state has employees who enter the state, they lose their motion to dismiss for lack of jurisdiction when the state taxing authority sues it to collect taxes. WTF are you going on about?

          “From a taxation perspective, your approach makes the tax more like a corporate tax, as opposed to a sales tax.”
          How, exactly, does denying jurisdiction to tax out-of-state businesses look anything at all like a corporate tax?, he asks, incredulously. The state has jurisdiction to tax its residents, where is doesn’t have jurisdiction to tax out-of-state businesses. That looks nothing at all like a “corporate tax”, and looks exactly like a use tax, which is what it is.

      2. Thirty-one states already were getting away with taxing online sales in ways far harsher than the “use taxes” some states still use. All of those were carefully crafted to stay under Quill.

      3. If the state has long-arm jurisdiction over a business by virtue of selling stuff to its residents, I don’t see how you can assert they don’t have jurisdiction to force the business to collect sales tax.

        1. Since I’m specifically opining that the right answer is the other end of your “if”, what is your point?

          I live in a state that has income tax, but not sales tax. Right next door, so to speak, is a state that has sales tax, and not income tax. Some people choose to exploit this thusly: They live in the state that has no income tax, and come over the border to shop for goods in the state that has no sales tax. This is legal, interstate commerce. It gets taxed, indirectly, because the out-of-state shoppers spend money that turns up as income to the shopkeepers in the state with income tax.
          The state that has a sales tax does not have the authority to require out-of-state businesses collect the sales tax they would have collected had the money been spent in-state. But they can require their state residents to declare and pay a “use tax” based on the taxes they would have paid had they shopped locally. They, in fact, do this, and collect for big-ticket items that need to be declared to the state for other reasons, such as car and boat registration.

          If we grant the state long-arm jurisdiction by virtue of the action of a third-party (the customer who shops across state lines), where does that end, and what power will the state need in order to detect and collect?

          1. “If we grant the state long-arm jurisdiction by virtue of the action of a third-party (the customer who shops across state lines)”

            We don’t. We grant it by virtue of the actions of the business, which purposefully avails itself of the state market and ships its products into the state. Which is the difference from your example, where the business isn’t shipping its products into the sales-tax state.

            1. So you’re arguing that the sales tax laws should be different depending on:

              A) if the customer picks up the goods, in person
              B) if the customer ships the goods, FOB from the warehouse
              C) if the customer ships the goods, as part of the purchase transaction?

              May I suggest a much, MUCH simpler approach?
              The sales tax is generated based on where the sale takes place. If the sale takes place in a state with no sales tax, then there is no sales tax. Where does the sale take place? Why, that would be where the goods are located when the money changes hands. If a business “avails itself of the state market” by entering the state, then the state can tax it. If a business “avails itself of the state market” by being willing to sell to residents of that state, but otherwise never enters the state, either in the form of goods or employees, then they can tell the out-of-state taxing authority to get bent.

              “Yeah, well, your customers arrange to have your products shipped into our jurisdiction, therefore we can tell you what to do” is crappy argumentation, and ought to be soundly rejected when it shows up in court.

              How about we apply it the other way? If tourists come and travel in this state, they’ve “availed themselves of the market of this state” and therefore, the state should be able to assert jurisdiction to collect personal income taxes from them?

              1. You realize that, under your theory, you would have to pay sales tax on things you order over the internet from Washington state (or any of the other forty-odd states that have sales taxes), right? And who cares if it’s simpler? The Constitution doesn’t mandate the simplest method of tax calculation and collection.

                “How about we apply it the other way? If tourists come and travel in this state, they’ve “availed themselves of the market of this state” and therefore, the state should be able to assert jurisdiction to collect personal income taxes from them?”

                You appear to be almost completely ignorant regarding the laws of personal jurisdiction which makes having a reasonable discussion almost impossible.

                1. “You realize that, under your theory, you would have to pay sales tax on things you order over the internet from Washington state (or any of the other forty-odd states that have sales taxes), right?”

                  You’ve made an assumption, there.

                  ” And who cares if it’s simpler?”
                  The people who have to manage compliance.

                  “The Constitution doesn’t mandate the simplest method of tax calculation and collection.”
                  I imagine that will come as a disappointment to anyone who advocates that it does. But how is that relevant to THIS discussion?

                  “You appear to be almost completely ignorant regarding the laws of personal jurisdiction”
                  Fortunately for me, I guess, the law school that granted my JD and the state bar association that found my knowledge of the law sufficient to practice law both disagree with you.
                  Since I’ve limited my discussion on this topic to my personal opinion of how the matter should be resolved, and haven’t written a damn word about how courts have actually done so, I’m wondering how you feel competent to discuss my knowledge?

              2. Where does the sale take place? Why, that would be where the goods are located when the money changes hands.

                Why doesn’t it take place where the money is located when the goods change hands?

          2. What JPH12 said. I assume from your description you live in Portland, Oregon. People who live in Vancouver, Washington and shop in Portland are not creating any nexus between the Portland business and the State of Washington. A business that ships its goods does.

            Also, as you know, Oregon residents can avoid paying sales taxes in Washington by displaying an Oregon driver’s license. Washington knows people will shop in Oregon otherwise, so allows this so that the money stays in the state.

            1. You like to make assumptions.

              “A business that ships its goods does.”

              Perhaps. But a business that ships its customers’ goods does not.

              1. Please explain.

                1. “You like to make assumptions” means that you get something in your head, and then you let it shape your future interactions, without bothering to find out if it was at all accurate first.

                  For example, because I know more about the Constitution than you do, and told you so, you decided that I am a Democrat. I am actually not affiliated with a party. You decided that I am opposed to private firearm possession, and I am not. You decided that I live in Portland, and… see if you can guess what comes next.

                  Then, once you’re in a hole, you try to bluster your way out, and REALLY don’t like it when you get called on that, too. So you flail away with random insults, hoping one lands. It’s funny to watch.

    2. So far, it seems to be working.

  2. I particularly like the gist of Thomas’s concurrence in Wayfair: “I ruled the other way on this issue a long time ago, that was a mistake and I acknowledge it – and I will not repeat that mistake today”.

    1. At the same time, I appreciated Robert’s “this is wrong, but fixing everything all the time leads to more wrongness that being able to rely on the rules being stable”.

      Certainly there is some economic (and common) sense in the idea that the losses from uncertainty are worth some increased threshold for overturning wrong things. Whether the wrongness of Quill was so large that it meets that bar is another question entirely.

  3. Interesting that this is always presented as a tax on the companies. A sales tax is a tax on the consumer, not a company. While it could be argued that a company physically located in a state, and receiving the benefits of the government (police, fire, roads to the store etc) can be dragooned into becoming uncompensated tax collectors, I still cannot see how a state can mandate that a company in a different state can be forced to expend funds as a tax collector for a state with which there is no relationship. What is the redress for the out of state company? Where is the representation? What will happen to a company in Florida that does not collect and remit sales tax to South Dakota? Will the respective state militias fight it out in southern Illinois? If a state can force an out of state corporate persons to act as its agents for tax collection, can it tax out of state individuals? At this time, many states impose income taxes on a resident that moves out of state during the year, but only for the part of the year they lived in the state. What is to prevent them from taxing for the whole year?
    40 pages of the supremes comes down to this; it is too inconvenient and expensive for a state to collect sales taxes from its own citizens, make an out of state company do it for free.
    Damn commerce clause; a tool of the devil.

    1. “A sales tax is a tax on the consumer, not a company.”

      Agree.

      The companies are obviously just going to pass the tax on to the customers.

      South Dakota is just screwing their own citizens.

      And just how is SD (or any state) going to monitor this?

      1. Technically, South Dakota already required residents to pay a use tax on internet purchases where sales tax wasn’t charged (or was charged at another state’s lower rate), as in failure to file your Use Tax Return is officially a Class 1 Misdemeanor. So I suppose the state’s alternative, had they lost, would’ve been subpoenaing Wayfair’s sales records to South Dakota (or UPS/FedEx records of shipments from Wayfair to South Dakota), comparing those to the Department of Revwnue’s records of Use Tax Returns, and then getting a warrant to arrest everyone who was on the purchaser/shipment list but there wasn’t a return for.

        Frankly, I’m surprised more cops and prosecutors haven’t used that strategy against their foes, because it seems like the thing that would easily establish probable cause for arrest warrants against most people.

    2. “A sales tax is a tax on the consumer, not a company.”

      Not that I think it matters, but wouldn’t that be a purchase tax rather than a sales tax?

      “Damn commerce clause; a tool of the devil.”

      Your anger is misplaced. CEI has already asked Congress to use its powers under the Commerce Clause to pass a law effectively overruling this decision, which doesn’t really have anything to do with the Commerce Clause.

    3. A sales tax is a tax on the consumer, not a company.

      Not exactly.

      A sales tax is a tax on a transaction. Both buyer and seller will pay part of it, with the exact division depending on the actual demand and supply curves.

      The seller gets less than he would without the tax, and the buyer pays more.

      There is also a deadweight loss. Some gains from trade are lost because there are transactions that did not take place due to the tax.

    4. A sales tax is a tax on the transaction. Ordering the retail company to collect it is a convenience for the government.

      Proof: States apply sales tax to exchanges of goods for goods, e.g. between farmers, where the amount is based on the value.

      Sometimes you see an ignorant official whine when a furniture store says they will “pay your sales tax!”, wondering why you shouldn’t pay income tax on the sales tax the store paid “for you.”

      IANAL but I did implement a tax auditor AI assistant for a state once. My favorite law equivocation was to remember that “this tax is not an income tax. It is just a tax proportional to income.”

  4. “renumeration”?

    1. It never hurts to check your arithmetic.

  5. The real issue is that states would have much less of a need to look for new ways to collect revenue if we weren’t supporting tens of millions of third world immigrants. For example, New Hampshire lacks an income tax and a sales tax. Their population is nearly all white, and as such, doesn’t require expensive services.

  6. ” Six justices, led by crossover sensation Justice Elena Kagan, ruled that SEC ALJs are “Officers.” ”

    Okay, they are officers, but are they officers that require confirmation by the Senate or are they “inferior officers that fall under: “but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

    1. “Held: The Commission’s ALJs are “Officers of the United States,” sub-
      ject to the Appointments Clause. Pp. 5?13.”

    2. “Both the Government and Lucia view the SEC’s ALJs as inferior
      officers and acknowledge that the Commission, as a head of department,
      can constitutionally appoint them.”

      Page 5, note 3 of the opinion.

  7. The Wayfair decision is bullshit and is going to outright destroy all small businesses on the internet.

  8. The Wayfair decision is bullshit and is going to outright destroy all small businesses on the internet.

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