Supreme Court Takes Up Internet Sales Tax Conundrum

Why I hope the Court leaves its "physical presence" rule for sales tax collection intact, or How I Learned to Love the Dormant Commerce Clause.


Last week, the Court granted cert in South Dakota v. Wayfair, a case that challenges the current legal status quo regarding online retailers' obligations to collect state sales tax. It is, I think, one of those unusual cases that is both fascinating, and rather profound, from a constitutional law standpoint, and simultaneously of truly prodigious practical, economic significance.

Here's the basic lay of the land. Early in the Internet Era (1992), the Supreme Court held, in Quill v. North Dakota, that a State may not require out-of-state sellers of goods or services to collect that State's sales/use tax*, unless the out-of-state seller has some "physical presence" in the State—a retail outlet, warehouse, office, or the like. So when an individual from, say, Illinois purchases goods from a seller located in Missouri—via an order placed over the telephone, or on the Net—Illinois may not require the seller to collect (and remit to Illinois) the sales tax that Illinois imposes on in-state transactions.

*Note that Illinois may—and actually does—impose a tax on Illinois taxpayers (e.g., on the purchaser, in my example) when those taxpayers make a purchase from an out-of-state seller. This tax is known as a "use tax"—based on the notion that it is not taxing the out-of-state "sale" but the buyer's "use" of the goods within Illinois—but it is generally set at a rate equal to the "sales tax" rate for in-state sales, and it functions as a sales tax equivalent.

Nothing in Quill interferes with the state's ability to impose those use taxes on its taxpayers, and most States continue to do so. But it does prohibit States from doing, in the context of "use tax" collection, what it does for "sales tax" collection, viz., requiring the sellers to collect the tax that is owed by the buyer and to remit the proceeds to Illinois—unless the seller maintains some "physical presence" in Illinois.

Quill is why most online retailers will, at checkout, say something like "Sales tax will be aded for sales to PA, NY, and IN"—places where, presumably, the seller does have a physical presence—"but not elsewhere."

The Quill Court rested its finding that taxing out-of-state sales is unconstitutional on the so-called "negative" or "dormant" Commerce Clause.

Now, the dormant Commerce Clause is one of those legal doctrines that most lawyers, I bet, still recall from Con Law I—and not at all fondly, finding it either entirely contrary to common sense and/or downright incomprehensible. For me, though, it was love at first sight (h/t to my Con Law I prof, Louis Michael Seidman, who gave us a really superlative introduction to the doctrine's many delights), and, love being blind, I've always managed to overlook and forgive the doctine's many flaws.

It's a truly stunning act of judicial creativity, crafted over several centuries of work. Here's the gist of it. In the Commerce Clause (Article I sec. 8), the Constitution gives Congress the power to "regulate Commerce … among the several States." The Court has, beginning in the early 19th century, found in this affirmative grant a power a corresponding negative, a prohibition on the exercise State power. Congress' power, in effect, is converted into an exclusive power to "regulate interstate commerce," and States may not exercise that power or interfere with Congress' excercise of it by "imposing excessive burdens on interstate commerce without congressional approval."

The Court has identified two primary categories of State actions that unconstitutionally burden interstate economic activity. First, States may not impose regulations that discriminate against out-of-State entities for the benefit of in-state entities—always a temptation for State law-makers. And second, they may not impose regulations that, while non-discriminatory, "unduly burden" interstate commerce by "subjecting it to haphazard, uncoordinated, and possibly inconsistent regulation" by States, a "welter of inconsistent and burdensome taxation and regulatory requirements" in areas of commerce that "by their nature demand cohesive national treatment."

It was this latter problem—the potential welter of burdensome taxes and regulations—that, in the Quill Court's view, doomed North Dakota's (and, by extension, any other State's) efforts to impose its tax across State lines:

North Dakota's use tax illustrates well how a state tax might unduly burden interstate commerce. North Dakota law imposes a collection duty on every vendor who advertises in the State three times in a single year. Thus, … a publisher who included a subscription card in three issues of its magazine, a vendor whose radio advertisements were heard in North Dakota on three occasions, and a corporation whose telephone sales force made three calls into the State, all would be subject to the collection duty. What is more significant, similar obligations might be imposed by the Nation's 6,000-plus taxing jurisdictions… [The] many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle a mail-order house in a virtual welter of complicated obligations.

Many people have complained about the Quill rule, vociferously, over the years, and the South Dakota statute now at issue in the Wayfair case—which provides that "sellers of tangible personal property in South Dakota without a physical presence in the state … shall remit sales tax according to the same procedures as sellers with a physical presence"—was clearly designed to give the Court an opportunity to reconsider and overrule it, which opportunity the Court, in its cert grant, has now apparently seized.

Complaints about the Quill certainly have considerable force. Quill allows an online retailer, operating out of her garage in State X, to sell goods to buyers in all other States without charging any sales or use tax, which puts local brick-and-mortar stores in X, who have to charge X's tax to all buyers, at a serious competitive disadvantage. This, many people persuasively contend, is both economically inefficient and has helped to destroy (or at least weaken substantially) those traditional brick-and-mortar retail outlets, with dire consequences for both the health of local retailing and for the state of America's cities and towns. A number of serious heavyweights have weighed in on the question via amicus briefs supporting South Dakota in the Wayfair case—from the National Federation of Retail Businesses to the American Booksellers Association to the American Farm Bureau to the National Governors' Association to the Attorneys General of 34 States.

But I think Quill got it right. The risk of strangling Internet commerce in a morass of complex and inconsistent obligations—6,000 plus taxing jurisdictions! – makes this precisely the sort of question that demands "cohesive national treatment" of the kind that only Congress can provide.

Of all the amicus briefs (available at Scotusblog), I found one submitted by Chris Cox, the former Republican Representative in Congress from California (and co-author, with then-Rep Ron Wyden (D-OR), of the "Internet Tax Freedom Act" of 1998) to be the most persuasive of all. He put the central issue this way:

A woman opens a small business out of her apartment in Idaho, selling iPhone cases principally over the internet … via her own web storefront. Her customers are mostly in the United States and Canada. In a typical week she fills orders primarily to New York, Florida, Texas, Illinois, Colorado, and California, with gross annual sales of $273,000. She rarely sells to customers in South Dakota—maybe four iPhone cases in an entire week. …

Because she lives and works in Idaho, she is registered with the Idaho State Tax Commission, the Idaho Department of Labor, and the Idaho Industrial Commission. She has paid the Idaho State Tax Commission for a seller's permit, and regularly files Idaho sales tax returns. Compliance with Idaho's rules requires her, like other businesses in Idaho, to be familiar with the State's varying tax rates and definitions of what is taxable, its audit and recordkeeping requirements, and its filing requirements (in her case, the requirement to file monthly sales tax reports).

South Dakota's law, however, does not merely require her to collect South Dakota's sales tax; it subjects her to the full range of South Dakota's tax and regulatory jurisdiction, including the panoply of South Dakota's licensing, recordkeeping, and registration requirements, and would, among other things, make her subject to periodic audit by the South Dakota Department of Revenue—which, in many States, requires an in-person appearance before the Revenue Board.

And of course if the Court discards the Quill rule and upholds South Dakota's law, we can expect other jurisdictions to follow suit.

South Dakota approvingly reports that "many other States have enacted provisions materially identical to South Dakota's," meaning that if this Court upholds the contested law in this case, even the smallest Internet sellers will quickly be subject to nationwide compliance burdens and the competing rules, filing requirements and audit demands of [thousands of] taxing jurisdictions.

This is precisely the sort of regulatory morass the dormant Commerce Clause was designed to prevent. It is yet another illustration of the central problem we face in applying legal rules to Internet communication. As Cox puts it, "the Internet's decentralized, packet-switched architecture," through which every individual website is "immediately and uninterruptedly exposed to billions of Internet users in every U.S. jurisdiction and around the planet," makes Internet commerce "uniquely vulnerable to tax and regulatory burdens in thousands of jurisdictions." Internet content is available to everyone, everywhere, simultaneously; that, however, cannot mean that it is thereby subject to the obligations imposed by all legal regimes, everywhere, simultaneously, because such a scheme is unworkable and incoherent.

Notice, too, that while South Dakota and its supporters argue that the Quill rule discriminates in favor of online retailers at the expense of local brick-and-mortar stores, abrogating the rule will have substantial discriminatory consequences in the opposite direction.

Consider again that Idaho seller of iphone cases. The moment she opens up her Internet storefront, she is subjecting herself to this burden of complying not only with Idaho's regulatory and tax authorities, but with the regulatory and tax authorities in whatever jurisdictions her electrons may enter, i.e., all of them. But her brick-and-mortar counterpart, who sells iphone cases over the counter in Idaho to customers in-store, has no such burden; even if he sells to Floridians or Californians passing through Idaho, his store only has to comply with Idaho's regulatory and tax apparatus. In Cox's words, "forcing one small business, with one location, to bear this burden is discriminatory when a large in-state retailer has no such burden."

There is a solution to this problem—and it is a fairly simple one at that. The dormant Commerce Clause disables States from acting because Congress has the responsibilty for solving problems like this. If the current status quo unfairly discriminates against brick-and-mortar retailers, a federal statute could require all retailers—online and off—to take X% of all sales and to remit that to a fund, administered by the federal government, from which payments will be made to the States based on their particular rates and the location of the transaction. Figuring out what X should be—presumably, some kind of weighted average of all current State sales taxes—and how the payment allocation formula will operate, are not trivial questions. But they're hardly intractable. It would operate, as far as consumers are concerned, as a national sales tax, though it would in reality be just a collection mechanism for State taxes.

It would require, yes, a functional Congress, and that's not what we seem to have these days. But it—or something like it, administered and authorized at the national level by our national institutions—is clearly the right answer to the problem, and if Congress weren't so, um, pre-occupied with other issues there might be a path forward to actually addressing this problem in a sensible and coherent manner. No, I'm not holding my breath—just hoping that the Court doesn't unleash the taxing hounds to go out and tear up the Net.

NEXT: Peffer v. Stephens, on Probable Cause and Home Computer Searches

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  1. I fully agree with both your premise and proposed solution. I only comment to nitpick a minor grammatical error: “Doctrines” should be possessive in your parenthetical.

    1. It sounds plausible. I’ve often wondered whether a system where *all* taxes (income, property, etc) were collected solely by the federal government and then allocated among the various states, counties, cities, and school districts from the top would work better. Every citizen would pay the same rates, we’d all know exactly how much that is, and the various political entities could fight among themselves for the percentage they get.

      1. If you’ll recall, the problem they faced with the Articles of Confederation was that all taxes were collected by the states, making the federal government too dependent on the states. You’d just flip that problem on its head.

        1. Unfortunately, large Federal grants to states are already making that the case to some extent.

      2. I shudder to think what the lack of tax competition would do to the rates of taxation.

        1. Well, the highest state income tax is around 10% while the highest Federal income tax bracket was until recently 39.6%. That should give you some idea.

    2. Aha! thanks … I’ll correct it.

  2. I look forward to this issue taking center stage with the Court this term. It is surprising that it has taken so long. While I agree that the internet and many other new technologies we enjoy do not fit neatly within laws promulgated during the prominence of physical dimensions of rights, this does not mean this is not possible, and it may do little good, and a lot of harm, to just hobble along trying to stitch together a patchwork of ill-fitting concepts in hope that all together some sort of functionality will be achieved. This is not Day One of the internet or of mobile devices or of any of the other gifts we enjoy.

    1. ” and it may do little good, and a lot of harm, to just hobble along trying to stitch together a patchwork of ill-fitting concepts in hope that all together some sort of functionality will be achieved.”

      Hobbling along and trying to stitch together a patchwork of ill-fitting concepts is precisely what will happen if state and local governments are allowed to force distant internet retailers to collect their state and local taxes.

  3. Hopefully the court will do its job and keep Quill, and in fact strengthen it. I want them to strike down the use tax concept and the download tax concept.

  4. Wow I misremembered Quill entirely as a due process case. Certainly that issue comes into play once/if the taxing is upheld but the state attempts to exert its concomitant enforcement procedur s (i.e., audits and in person appearances)

  5. Well, Cox’s woman selling iPhone cases is hardly a persuasive example.

    Amazon does about five million times her $273,000/yr. Is it really asking too much to require Amazon and other giant online retailers to track sales tax rules? They have no problem tracking everything else. Any time someone hauls out the sort of argument Cox is making here I tend to doubt the strength of their case. It’s the apocryphal small farmer whose family is devastated by the estate tax.

    That said, I do think David Post’s proposal would be better than every state and municipality imposing its own taxes, but it doesn’t have a snowball’s chance of being enacted. An alternative would be for state governments to simplify matters for out of state retailers who sell less than some amount in the state. Under $5 million, say, and you pay a flat rate to the state and provide sales by zip code. Maybe that’s impossible also.

    On a tangent, the whole “physical presence” rule is a little strange to me. If my company has a distribution center in some state there is a nexus. If we pay UPS or Fedex to handle it for us out of their facilities we don’t.

    1. Two things: Not every internet seller has Amazon’s resources, and Amazon doesn’t do very well at collecting sales taxes in the correct amount.

      Amazon appears to decide how much sales tax to collect based on the zip code where purchases are shipped. The problem is that a single zip code may cover several different cities with different rates of sales tax. Often zip codes cover unincorporated areas that have no sales tax. Some incorporated cities may be in a zip code that also covers cities with a sales tax.

      My own case is an example. I live in Colorado in zip code 80113. The Colorado State sales tax is 4.25%. The municipality I live in and to which my Amazon orders are shipped has no sales tax. Thus, Amazon should collect 4.25% sales tax on my orders. Instead it collects 7.75%. Because the post office of zip code 80113 is located in the city of Englewood, Amazon adds Englewood’s 3.5% sales tax to my order.

      I don’t owe any sales tax to Englewood because I don’t live there and my Amazon purchase has no nexus to Englewood. Yet, Amazon will not address this situation. Amazon has ignored all my requests to stop charging me the incorrect amount of sales tax.

      1. Sure. Amazon is the giant, but there are other very big online retailers as well. I certainly wouldn’t mind an exemption level, or a default option as I described for smaller retailers. “Want to sell in our state? Just send us x% and don’t worry about the different municipalities and the like.”

        As for Amazon and similar, I have little sympathy with their troubles over this issue. They have no trouble knowing what I buy, where I live, what I browse for, etc. Keeping track of sales tax requirements ought to be a piece of cake. If they do it poorly they are not trying. Indeed, I suspect that if states are allowed to collect sales taxes from online retailers it won’t take long for Amazon, or somebody, to start offering a service that keeps track of the whole thing.

        It’s a complicated issue, I guess, but it does seem unfair and undesirable for the local retailer to get hit when competitors don’t.

        1. You cannot make constitutional rules that rest on dollar amounts or size of business exemptions, that is not what the Constitution contemplates (and its where the Court often makes its most unfounded and strange decisions, such as imposing the Roe trimester framework, or Basing Brown v. Board on fuzzy social science instead of the plain text of the 14th Amendment).

          Rules that have numbers in them are for Congress.

          1. That’s true.

            But state legislatures, assuming there are any sensible ones, can also make such rules.

        2. In practice, that sounds like a fair rule (though it could have bad effects at the margin where a seller’s really hoping not to sell more than the exemption level.) But, Constitutional rules need to be derivable from the Constitution, and you can’t get those exemptions from there.

          I agree it’s unfair for the local retailer to get uniquely burdened by sales tax; that’s why Dr. Post’s national sales tax fund sounds like such a great idea.

        3. As a policy matter, requiring only state sales tax, rather than state and municipal taxes, makes a lot of sense. As municipalities usually derive their taxing authority (well, sales tax, not property) from states, it would likely meet state constitutional muster.

          The problem comes from it not being about just the 5% or whatever; it’s also about the registration requirements.

      2. I have some experience in this. We get a 100K line data file every month with “current” sales tax rates, and also deal with several tax companies. It is amazing how everybody has different ideas of what the tax rates are. I’d say 99% of the time, the total rate is the same, but differ widely in how they divvy it up between various fiddly little tax-collecting jurisdictions. You sometimes look at the different tax calculations and wonder what kind of alternate universe they are pulling answers from.

        I bet any detailed audit would find that half the calculated taxes are wrong in some picayune distribution difference, and an unrelated half are different in value. No one who has to deal with current US sales taxes thinks they are even close to sane.

        European VAT s simpler but full of its own little pitfalls. For instance, there are two cities on the northern shore of a lake (or maybe different lakes) which straddle the Italian-Swiss border. Presumably because the only way to get there was by boat or cross two international borders, they are VAT-exempt. There’s at least one village in Switzerland which is German and similarly tax-exempt. The two Spanish colonies in north Africa are tax-exempt.

        Yet every tax company I have seen charges VAT there.

    2. “Bernard’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

    3. “Is it really asking too much…” Yes. Yes it is. It is an incredibly inefficient, wasteful, and needless expenditure. It’s asking too much to ask anybody to do it.

  6. This seems to me like the kind of squirrelly quibbling that gives lawyers their reputation. Me, not being a lawyer, detest such quibbling, and have an entirely different take on this.

    If I walk into any store in this country and buy something, no one asks to see some identification so they can charge me tax based on where I live. They charge tax based on where the store is. Some people say “Ah no, it’s based on where the transaction takes place”, which may or may not be the original impetus, but I don’t care: I’m not a lawyer, quibbly or otherwise.

    The only sane and simple rule is that all purchases should be taxed based on the seller’s location. Then people ask “So where is Amazon?” and I say wherever they are incorporated.

    What I want is (a) simplicity. It is utterly ridiculous that Amazon is responsible for calculating tax in thousands of jurisdictions, taking care to be aware of tax holidays, different ideas of what constitutes school supplies, or the difference between snacks and food.

    I also want states to have to compete for businesses. I want Amazon to be able to say, “Hey, you are raising the sales tax too much, we are going to reincorporate elsewhere”, and I want states to be paranoid about losing business when they do stupid things.

    1. I was going to post the same points. You beat me to it.

    2. Then watch states enact 300% sales taxes for transactions which are shipped out of state. Doesn’t harm their residents. Would effectively end small retailers selling out of state.

      1. And business would either raise holy hell for all the customers they lost, or remain local, or move out of state, or go out of business.

      2. “Then watch states enact 300% sales taxes for transactions which are shipped out of state.”

        That size straw-man could end life on earth if it burns.

    3. Wouldn’t that defeat the purpose of having a sales tax rather than just increasing company taxes?

      (But if it’s simplicity you want, let me recommend GST: one rate, charged on everything. No tax holidays, no need to decide what constitutes a school supply or a snack. I’m no expert, but as far as I can tell it has worked well here in New Zealand.)

      1. EU VAT taxes are complicated by all sorts of categories. Last I saw, they had around a hundred categories (school supplies, agricultural equipment, …) and widely varying rates.

        The base problem is that governments create a zillion varieties of taxes to hide the fact that they just want more money, to try to dress taxes up as nudging behavior in some way, to make it seem more moral than a pure money grab. If governments were honest about that, or if the populace wouldn’t let them get away with pretending that taxes are a question of morality nudges, then maybe they wouldn’t have all these intricate special cases and carve-outs for their cronies.

        1. If I remember correctly, way back when GST was first introduced here one of the reasons given for a flat rate was indeed to avoid the sort of mess that VAT had created in the EU.

    4. Actually, I live in Alaska (which does not have a state-level sales tax), when I travel to Washington I can buy goods destined for use at home without paying sales tax, and I do show ID for that. And my family owns a small retail store, if an out-of-town buyer is willing to jump through some hoops (mostly requires removal of the goods via common carrier) the borough sales tax is not applied.

    5. I don’t think that’s such a good solution, since you continue to burden brick-and-mortar stores in the high-sales-tax jurisdictions (soon to be the any-sales-tax jurisdiction, as Amazon shifts its corporate headquarters to the first place to totally abolish sales taxes.) If you want to choke off all commerce there, I think you should just come out and say so. Meanwhile, I don’t think sales tax should be uniquely disfavored above other forms of taxation.

  7. This is critical for small businesses on both sides and for consumers. Every piece of complexity enables giants like amazon and inhibits the small guys.

    1. “enables giants like amazon and inhibits the small guys”

      Exactly, its why Amazon switched its view 180 degrees..

  8. Would there be constitutional or practical issues with requiring, e.g., the customer’s bank to apply a Goods and Services Tax as it processes credit card payments? That would cover international sales as well as inter-state sales, which seems like a potential weakness in your proposal – one we struggle with here in New Zealand.

    … it would have to be a GST, i.e., a flat rate on everything, rather than a Sales Tax of the sort Americans are currently accustomed to. But I believe there are a number of other advantages to GST, e.g., a flat rate must significantly reduce compliance overhead.

    You’d have to also charge tax whenever someone puts money into, e.g., PayPal, I suppose, unless you can require or negotiate with them to collect the taxes for you. That might cause problems.

  9. Regarding your proposal: is there any particular reason there would have to be a single rate for all states rather than a schedule of rates authorized by Congress but based on what the States request? Similarly, why not have the Federal government collect the funds for each State separately rather than a single pot?

    … I mean, I see that adds some additional burden on the retailer, but we’re talking internet sales here – the computers can handle adding fifty-something different taxes easily enough, so long as they’re all flat rates.

    1. Okay, fifty, with a simple lookup table based on the state appearing in the mailing address, is fine. Fifty thousand isn’t.

      I think we should draw the line at either “one” or “fifty,” and I’m indifferent as to which.

  10. Both vendors and customers are global, not national. Using the same logic you already did, the solution can’t be statewide, nor country wide, it must be global.

  11. I’m sorry but the Idaho home phone case vendor argument is a crock. A few moments looking at the South Dakota law reveals that it only applies to sellers who sell at least $100K of stuff in South Dakota, or that make at least 200 separate sales. If she’s selling that much, she can bleeping well figure out how to collect the tax. Other states have similar thresholds.

    I also happen to agree that it would be a good idea to come up with streamlined interstate tax collection, but guess what, they’re working on that, too. See the Streamlined Sales Tax Project (SSTP) at

    1. “If she’s selling that much, she can bleeping well figure out how to collect the tax.”

      “that much”?

      Its 4 sales a week. Real big business she has.

      Its not that she cannot “figure out” the tax, its all the paperwork that goes with it that sucks up her time.

    2. Maybe that’s the case for South Dakota, but once you open this up, I promise you the threshold will inch its way down.

      I actually have two legal journal publications on this issue. In one, I addressed trucking companies which must pay taxes in states where they have a certain minimum presence. I figured out that if you wanted to ship between, say Massachusetts and Pennsylvania, you’d need to go through New York at some point. If you took the shortest distance and made the minimum number of entries, you could travel all of about 100 miles and be forced to pay several hundred dollars in a franchise tax.

      I became interested in the issue when a client, a trucking company, had its truck stopped in New Jersey (or some other nearby state). The trooper asked how many times the driver had entered the state. It was something like a dozen times. The trooper than held the truck and refused to release it until the company (a small family operation) paid several years of back franchise taxes (and penalties). It was several thousand dollars, all because the truck entered the state a handful of times.

      Point is, it’s $100k now. But if it works, it’ll be $100 soon enough.

    3. But it’s not a crock. You’re correct – because of its exemptions and thresholds, the Idaho vendor MIGHT not be subject to the tax. But imagine figuring that out, FOR ALL FIFTY STATES. Every State will have its own exemptions, its own exceptions, its own thresholds, its own reporting requirements (“Reports are due on the 1st Thursday after the 3rd Wednesday of every month, unless it’s a leap year, in which case …”). Whether she is or isn’t subject to SD tax isn’t the question – the question is how will you know whether you’re subject to the taxes levied in each of the many thousands of jurisdictions.

  12. If I’m traveling, and I buy something in North Carolina, say a tank of gas, or a bottle of Mt. Dew for the road, can South Carolina tax me on it when I enter the state? I’m pretty sure that the answer to that is “no”; They’d be taxing interstate commerce.

    By that reasoning, I don’t see how South Carolina can charge a tax on online purchases where the item originates out of state. It’s not really different enough from me going there to pick it up; The states can’t tax interstate commerce.

    1. I don’t know about South Carolina, but according to the letter of the instructions on the North Carolina use tax form, North Carolina says you’d need to pay them tax in the reverse situation if you were a North Carolina resident.

      1. Yes, and you’ll notice just how much effort they devote to enforcing that provision of the tax law, too.

        Lots of laws that would go down if ever challenged hang around just because the government takes care not to try to enforce them.

  13. I agree with a post by David Post. Is a killer meteor coming?

  14. I agree with Justice Thomas that there is no negative commerce clause. There is only a grant of power to Congress. If Congress thinks the various doctrines the Supreme Court has promulgated over the years are good policy, it can simply enact them into law.

    Centralization has risks as well as benefits. If all the hamburger in the US were slaughtered in one central slaughterhouse and chopped and mixed in one giant vat, the price might be cheaper, but any mishap – disease outbreak, mechanical breakdown, fire, flood, etc. – would hurt the entire country rather than being localized and contained. It is solely for Congress to weigh the benefits against the risks and say when centralization is a net good for the country, and when localization and local barriers represent better policy. It isn’t the Courts’ business.

    That said, I think there’s an argument, under current doctrine, that accounting and computer advances make accounting for taxes in multiple jurisdictions less burdensome today than it was in 1992. And it’s also possible could impose limits or restrictions, for example, requiring that states collecting taxes from out of state businesses have to permit them to respond to audits etc. by mail, cannot require them to appear in person except under limited circumstances. Similar limitations might address other concerns.

  15. “abrogating the rule will have substantial discriminatory consequences in the opposite direction.”

    This is not hypothetical or trivial. New Hampshire does not have a state sales tax; Massachusetts does. Both states are geographically small. New Hampshire has malls and liquor outlets located just over the MA border on interstate highways. It is exceedingly clear that they are placed there to take advantage of Massachusetts’ sales tax and the residents of the Commonwealth who would like to avoid it.

    On an intuitive level, it seems wrong to say that MA could reach into NH and require those NH businesses to collect sales and remit sales taxes on MA residents. It would also be onerous to require that everyone checking out of ThinkGeek at the Rockingham Mall to provide a ZIP code and for the cashier to have to hand-calculate the tax, rather than having one uniform tax based on the location of sale.

  16. I’m surprised the Supreme Court took this case. Leave the status quo alone, and if there is a serious enough problem with it, then Congress can fix it. I don’t agree with the idea that the Supreme Court needs to do the job of Congress because Congress is “disfunctional.” It’s amazing how truly functional Congress can become when legislation is absolutely needed.

  17. State ‘use’ taxes apply not only to goods purchased in (or from) other states, but to goods purchased abroad. I have always wondered, and perhaps someone could tell me, why a Michigan tax on goods purchased in (say) London or Paris is not tantamount to a tariff, and why that does not violate both the dormant commerce clause and the prohibition of non-uniform “Duties, Imposts and Excises.”

  18. Your proposal leaves rather perverse incentives. Currently there are states with higher and lower sales taxes, and even states with no sales tax at all. Nationally taxing at some sort of weighted average tax rates and paying in proportion to tax rates says “Every state except the one with the highest sales tax is a sucker.” States race to one-up each other in their sales tax rates so they get more of the pie.

    The “problem” you identify isn’t actually unfair at all relative to any other possibility. Yes, the brick-and-mortar-store is disadvantaged– by choosing to live in a jurisdiction with a high sales tax. A jurisdiction they get to vote in, and foot vote out of, and get whatever services those sales taxes are paying for in. Far be it from me to say that that makes the taxation acceptable, but it certainly doesn’t mean that some other person who doesn’t get those things should be bearing the burden for them.

    1. If you buy everything online, you’re avoiding the tax but still receiving the services the tax is paying for. Whether or not that is fair is arguably a matter of opinion, but it certainly creates unfortunate incentives.

      One of the more obvious effects of those incentives is to disadvantage the local stores – who are after all *not* the ones receiving the services those sales taxes are paying for.

      1. The local stores (and their owners) ARE receiving the services those sales taxes are paying for. (In theory, anyway). They are local. They, and their owner, live there. According to the theory of people who advocate sales taxes (and most other taxes), the services they pay for go to the residents of the taxed jurisdiction.

        The current regime might not be fair w/r/t the customers, but it’s certainly fair w/r/t the stores.

        1. The owner is receiving services that are paid for by the sales tax that he pays when he buys stuff for himself, not services that are paid for by the sales tax that *other* people are charged when they buy from him.

          To put that another way: the owner pays sales tax *and* loses business; everybody else just pays sales tax.

          (Mind you, whether that’s really a major problem depends on just how much business he’s losing, which may be hard to accurately measure. And it could perhaps be compensated for by lowering business taxes and/or rates, though that would leave the state and/or local government out of pocket.)

          That said, does my earlier proposal address your concerns?

  19. Another option that would make more sense than this proposed scheme is that the states can simply come up with another way to collect taxes besides drafting businesses to collect sales taxes for them (keeping in mind that the tax is technically on the purchaser and the merchant is simply collecting the tax on behalf of the government).

    1. I think if you asked an economist they’d say that coming up with “another way to collect taxes” isn’t all that simple. 🙂

      I can’t say from my own knowledge whether sales taxes really do produce better economic results compared to other sorts of taxes, but I’ve seen it asserted that they do. By people wanting to introduce/increase them, of course, so take that with a grain of salt!

      1. I get the feeling the average small business owner receives state services somewhat out of proportion to their personal sales tax. They receive both state services as an individual, and as a business in that they can call the cops on shoplifters and the like.

        Granted, there are also licensing fees and such, and who knows how all that balances out (no one btw, it’s impossible to determine a really really fair price for services that aren’t subject to market pressures from people being free to simply not buy it if it isn’t worth it), but considered in isolation the sales tax costing them more doesn’t seem patently unfair.


        1. Your earlier proposal still leaves it to the discretion of states what they demand, and hence they are incentivized to demand the highest.

          On the other hand, I have no particular objection (other than my general objection to all taxation) to a federal rule that says “the general sales tax rate that applies to normal brick-and mortar transaction within the consumer’s state apply’s to that consumer’s online purchases between and enforcement is between the consumer and the state.” (with perhaps a federal reporting requirement that is as simple as “report to the state that you are shipping to the fact of a transaction, the address it was shipped, the name provided by the consumer, and the financial institution through which payment was mediated, so that there is no burden on the seller to learn sales tax rules and withhold it, but the state can figure out what they want to charge to the consumer and the financial institution simply takes it from that account). That way, there’s no substantive burden on the seller that they can’t foot vote their way out of, it’s all on the consumer who has both foot voting and normal voting power.

        2. Cont…

          Or “States must apply their general sales tax rates to transactions made by sellers within their states–” that just makes it normal everyday tax competition between states, just like when we Washingtonians head down to an Oregon auto dealership to avoid sales tax, and hence also stays internalized for the purposes of foot voting. The states are imposing only the burden of knowing one sales tax withholding regime on their online sellers, the same as their brick and mortar one, and hence the costs are all internalized enough here too for foot voting and normal voting to work at their normal levels of functionality. The states, if they want to be fully libertarian about the issue, remain free to not have a sales tax regime at all and hence foot voting remains free to choose such states if they choose to exist.

        3. Cont…

          Or “States must apply their general sales tax rates to transactions made by sellers within their states–” that just makes it normal everyday tax competition between states, just like when we Washingtonians head down to an Oregon auto dealership to avoid sales tax, and hence also stays internalized for the purposes of foot voting. The states are imposing only the burden of knowing one sales tax withholding regime on their online sellers, the same as their brick and mortar one, and hence the costs are all internalized enough here too for foot voting and normal voting to work at their normal levels of functionality. The states, if they want to be fully libertarian about the issue, remain free to not have a sales tax regime at all and hence foot voting remains free to choose such states if they choose to exist.

        4. Cont…

          Or “States must apply their general sales tax rates to transactions made by sellers within their states–” that just makes it normal everyday tax competition between states, just like when we Washingtonians head down to an Oregon auto dealership to avoid sales tax, and hence also stays internalized for the purposes of foot voting. The states are imposing only the burden of knowing one sales tax withholding regime on their online sellers, the same as their brick and mortar one, and hence the costs are all internalized enough here too for foot voting and normal voting to work at their normal levels of functionality. The states, if they want to be fully libertarian about the issue, remain free to not have a sales tax regime at all and hence foot voting remains free to choose such states if they choose to exist.

          1. Cont… man bypassing the char limit is so clunky, it doesn’t let it through 8 times, then it duplicates with one click

            Now, mind you, I just have no PARTICULAR objection to those things. I still have the general objection that all taxation is evil of course. But these tax rules would not be ESPECIALLY evil in disabling even the normal and weak safeguard powers of foot voting and normal voting, like I think a federal-average or a federal-take-whatever-the-states-say-to-take rule would do. Call my two alternative proposals here a “federal consumer’s nondiscriminatory rate” and a “federal seller’s nondiscriminatory rate” approach. It’s not an average, and it’s not whatever the state’s say, it’s whatever the states actually charge to their general brick and mortar stores, either we have a reporting requirement to enable them to enforce it on their consumers, or they are required to enforce it on their sellers, in either case being forbidden to give online sellers a different rate from their general applicable sales tax. Of course, states make all sorts of brick and mortar exemptions to their generally applicable sales tax, so they would still have an effective means to discriminate, but at least they’d have to go the long way around their protectionism

            1. If the state you live in implemented an excessively high internet sales tax, you’d be free to both vote against it and to move to another state. So I don’t think that’s any more of a problem than with any other tax.

              The idea that an internet sales tax might be used as a sort of excise tax for inter-state protectionism is an interesting one. I wouldn’t have thought that would be a problem – are the states really that hostile to one another? – but I guess you’d know more about that than I would. I don’t think it’s a huge problem, though; you could require Congress to approve both the initial rates and any changes, or give the job to whatever federal agency you think best.

              The two obvious problems with the state a business is located in charging that business a tax on out-of-state sales are (a) if you do that it isn’t really a sales tax any more, i.e., it becomes a tax on the business, not a tax on the consumer, so you lose the alleged economic benefits of sales taxes; (b) the upshot would just be the status quo, no internet sales tax, due to the “race to the bottom” effect. Granted I don’t imagine you care about (a) and would probably welcome (b) I’m taking the Devil’s Advocate position here, so to speak, and arguing from the perspective of the state government which does after all need to fund itself somehow. 🙂

              1. The arguments you level against “race to the top” concerns are also applicable to “race to the bottom” concerns, but in practice, when a race to the bottom is incentivized, it still happens. So, in practice, when a race to the top is incentivized by the rules, it will still happen, regardless of the (in practice, probably useless due to lack of coordination) votes possessed by internet consumers.

                You are correct that I have no objection whatsoever to a race to the bottom, and consequently am absolutely shit-my-pants-terrified at any possibility of a race to the top.

                “Being a tax on the business and not the consumer” cannot possibly lose any “economic benefits.” Economically, the two taxes are absolutely identical. If you “tax the business” it is reflected in consumer prices. What matters, economically, is what sort of transactions incur tax liability, not in which party to the transaction that tax liability is incurred.

                Yes, states are hostile to each other. That’s why congress is so dysfunctional. Hundreds of state-elected legislators all fighting each other for pork.
                Giving the job to Congress is hence not a solution at all, and giving it to a federal executive agency is going back to that “average” solution that gets rid of tax competition, foot voting effects, ballot effects, etc.

                1. I don’t think the two taxes are economically identical, since the business incentives (“where shall I site my business”) as well as the consumer incentives (“which business shall I buy from”) are different.

                  I’m also not clear on why you think state sales taxes would “race to the top” any more so than, say, state income taxes?

                  1. State income taxes have at least some race to the bottom effect because people move away from the states with the highest income taxes.

                    This doesn’t affect internet retailers, who are under the proposal subject to taxes from a place they don’t live anyway.

  20. In a Dec 2017 purchase at a brick-and-mortar store, I paid $124.99 + $11.07 in sales tax.
    That’s about an 8.85% surcharge in sales tax total.

    In two Dec 2017 and Jan 2018 transtate internet purchases by mail order, I paid $101.80 + $17.00 shipping and handling.
    That’s about a 16.7% surcharge in shipping and handling total.

    Yeah, I’m plotting to put local brick and mortar shops out of business by making internet purchases to avoid sales tax by paying nearly twice as much for shipping and handling, because my conspiracy to put brick and mortar shops out of business is that nefarious, Mawahahahaha!

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