The Volokh Conspiracy
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Justice Kennedy's opinion supporting states' collecting taxes on Internet/mail-order transactions
Tuesday's Supreme Court decision in Direct Marketing Ass'n v. Brohl involved a procedural question, but the underlying substantive issue is also very important: What can states do in order to collect sales and use taxes on Internet and direct mail transactions, where the seller is outside the state but the buyer is inside? And Justice Anthony Kennedy's concurring opinion signals that—when the substantive issue comes before him—the answer would be "a lot": he would reverse Supreme Court precedent that generally bars states from collecting such taxes from the out-of-state sellers. Here's most of Justice Kennedy's opinion (some paragraph breaks added):
It [seems] appropriate, and indeed necessary, to add this separate statement concerning what may well be a serious, continuing injustice faced by Colorado and many other States.
Almost half a century ago, this Court determined that, under its Commerce Clause jurisprudence, States cannot require a business to collect use taxes—which are the equivalent of sales taxes for out-of-state purchases—if the business does not have a physical presence in the State. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967). Use taxes are still due, but under Bellas Hess they must be collected from and paid by the customer, not the out-of-state seller.
Twenty-five years later, the Court relied on stare decisis to reaffirm the physical presence requirement and to reject attempts to require a mail-order business to collect and pay use taxes. Quill Corp. v. North Dakota, 504 U.S. 298, 311 (1992). This was despite the fact that under the more recent and refined test elaborated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), "contemporary Commerce Clause jurisprudence might not dictate the same result" as the Court had reached in Bellas Hess.
In other words, the Quill majority acknowledged the prospect that its conclusion was wrong when the case was decided. Still, the Court determined vendors who had no physical presence in a State did not have the "substantial nexus with the taxing state" necessary to impose tax-collection duties under the Commerce Clause. Three Justices concurred in the judgment, stating their votes to uphold the rule of Bellas Hess were based on stare decisis alone. Id., at 319 (Scalia, J., joined by Kennedy, J., and Thomas, J., concurring in part and concurring in judgment). This further underscores the tenuous nature of that holding—a holding now inflicting extreme harm and unfairness on the States.
In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy. There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently "substantial nexus" to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, "interstate commerce may be required to pay its fair share of state taxes." D. H. Holmes Co. v. McNamara, 486 U.S. 24, 31 (1988).
This argument has grown stronger, and the cause more urgent, with time. When the Court decided Quill, mail-order sales in the United States totaled $180 billion. 504 U.S., at 329 (White, J., concurring in part and dissenting in part). But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.
Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors. The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register. The facts of this case exemplify that trend: Colorado's losses in 2012 are estimated to be around $170 million. States' education systems, healthcare services, and infrastructure are weakened as a result.
The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper's favorite store is a click away—regardless of how close or far the nearest storefront. Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.
Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. See Pearson v. Callahan, 555 U.S. 223, 233 (2009) (stare decisis weakened where "experience has pointed up the precedent's shortcomings"). It should be left in place only if a powerful showing can be made that its rationale is still correct.
The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.
As Justice Kennedy notes, Justice Antonin Scalia and Clarence Thomas also expressed similar substantive views in Quill (1992), though they weren't prepared then to overturn the precedent; query whether they, and some other Justices, would go along with Justice Kennedy in a future case.