The Dormant Commerce Clause, the Internet, and Geolocation

A response to Professors Goldsmith & Volokh

[Update 4/27—This posting has generated an unusually vigorous and enlightening discussion in the Comments section. Recommended reading.]

Several months ago, Eugene posted [here] an article that he and Jack Goldsmith had written for the Texas Law Review regarding the Dormant Commerce Clause and its application to State regulation of online activities. [The final version, in the Texas Law Review, is available here] "The constitutionality of such State regulation," they argue, "should generally turn on the feasibility of geolocation—the extent to which web sites or other Internet services can determine, reliably and inexpensively, which states users are coming from." Their argument goes something like this:

• In the Internet's early days—1995 or thereabouts—websites and other online businesses were unable, as a practical matter, with reasonable accuracy at reasonable cost, to determine user location.
• Therefore, requiring websites and other online businesses to "apply the proper state law to each user"—to treat Iowans (and transactions within Iowa) as Iowa law requires them to be treated, Floridians (and transactions within Florida) as Florida law requires them to be treated, etc.—would have imposed an enormous burden on those businesses.
• The Dormant Commerce Clause jurisprudence of the time recognized this. Many attempts by States to enforce their laws against out-of-state websites were accordingly struck down as impermissibly burdensome on interstate commerce, in significant part because of these difficulties of determining user location.
• But that condition no longer holds. "Geolocation has become feasible in recent years, and is routinely used by major web sites for ordinary business purposes."
• Thus there is now "more constitutional room for state regulation of Internet services, including social media platforms, than often believed."

The argument, while plausible enough, strikes me as misguided and deeply flawed, on a number of important dimensions. The legal rule for which they advocate amounts to a declaration that Internet businesses are subject to the local laws of all jurisdictions in which their users may be located, which would constitute a prodigious burden on interstate commerce—precisely the sort of thing the Dormant Commerce Clause protects (and should protect) against.

I was worked up enough to write a (moderately) detailed response (which the Texas Law Review Online has published here).  My counter-argument has three parts:

1. Goldsmith/Volokh greatly underestimate the burdens imposed by their multi-jurisdictional compliance scheme. Geolocation technology does not solve the problem of applying local law to online activity, it accentuates it. Determining where users are located is the easy part of the problem; the hard part is figuring out what the laws of the various jurisdictions require in any specific instance, information which geolocation tools do not and cannot provide.

2. Goldsmith/Volokh's argument relies on a transparent legal fiction: that activity on the network can be deemed to take place "in" any jurisdiction from which it can be accessed by users, i.e., that websites are doing business "in Wisconsin" and "in California" whenever they transmit information from or to users located in Wisconsin and/or California. Some legal fictions are useful; this is not one of them.

3. Goldsmith/Volokh's argument relies in large measure on a false equivalence between Internet and real-space commerce. They rely throughout their article on a straightforward analogy: Because brick-and-mortar businesses that deal with customers all over the country have to comply with the laws of the places where they operate, so too should Internet businesses that deal with customers all over the country have to comply with the laws of all of the places where they operate.

Again, it seems plausible. Why shouldn't Internet businesses be treated just like brick-and-mortar businesses for purposes of determining the laws applicable to their conduct?

My answer is a little complicated, but, I think, pretty fundamental.  In realspace, the vast majority of businesses of all sizes start their lives with a very restricted geographic reach. Think: Ray Kroc's first hamburger stand in Des Plaines, IL, Sam Walton's general store in Bentonville AR, Howard Schultz's coffee shop in Seattle WA. This is not just a sociological phenomenon; it's inherent in the physics of realspace, where the cost of transporting things (and people) is an increasing function of distance traveled. When their operations began, Schultz did not sell coffee, nor Kroc hamburgers, nor Walton shoes, in Colorado or Florida.

As a consequence, if, say, Colorado enacted a strict coffee-labeling statute, Schultz could ignore it, for he was not doing business in Colorado, and therefore his business was not subject to its law.

He could expand the geographical scope of his operations, of course—opening up a coffee shop in Oregon, or shipping roasted beans to retailers there. This would entail additional costs—not only distribution costs, but legal compliance costs as well; now that he is doing business in Oregon, he'll need to figure out what Oregon requires of retailers who do business in Oregon—its tax laws, employment laws, food-labelling laws, and all the rest—and then to re-configure his business if and as necessary to comply with those requirements.

Those additional costs are part of what we might call "the federalism bargain," costs that are inherent in having a federal system that allows WA and OR to regulate businesses in very different ways. The bargain is pretty straightforward: If you want to take advantage of the Oregon market—interstate commerce—you have to bear these costs; conversely, if you don't want to bear those additional discovery/compliance costs, you are free to stay out of Oregon.

The Internet inverts this logic completely. Again, its the physics of the place; the cost of transmitting bits is not an increasing function of distance in any meaningful sense. As a consequence, Internet businesses start their lives without any limitations on their geographic reach; a website in Bentonville, Arkansas is equally available everywhere on the global network. That's one of the things that has made the Internet the Internet.

So a rule that says "You must comply with the law in all jurisdictions where you conduct business" is vastly more burdensome on Internet businesses than on realspace businesses. Or so I argue.

Comments, of course, welcome.

Comments

[Absaroka]

“”Geolocation has become feasible in recent years, and is routinely used by major web sites for ordinary business purposes.”

I routinely get geolocated a hundred plus miles from my actual location. This isn’t the result of using a VPN, just turning off the automatic location services in the browser. Which is my ‘legal’ location?

And if I was using a VPN, or spoofing my location, that raises the question – is acme.com liable for sending me content that’s legal in the geolocated location, but not in my actual location?

“So a rule that says “You must comply with the law in all jurisdictions where you conduct business” is vastly more burdensome on Internet businesses than on realspace businesses.”

I have a friend that runs an internet business, and has to collect sales tax. That is really hard; sales taxes are very granular. You can’t, for example, just have a lookup table of sales tax rates by zip code, because tax districts can and do split zip codes. According to my friend there are commercial ‘compute the sales tax’ services that will tell you the correct rate for a given address, but those services are prohibitively expensive for a small business. He devotes considerable time to doing the best he can, and I suppose hopes he doesn’t get audited for compliance by some state on the other side of the country.

A physical small business doesn’t have this problem at all – it only has to know – and keep up with changes to – the rate for its physical location.

[Dr. Ed 2]

Actually, no — if a store in tax-free NH ships to Massachusetts, it must charge the MA sales tax.

[Rossami]

You are misunderstanding the comparison. This isn’t about shipping. That’s an optional business activity that you can expand into – if and when you are ready. This comparison is more about standard retail. If a store in tax-free NH sells to a walk-in customer who happens to live in MA, it does not need to charge the MA sales tax to that customer.

[Á àß äẞç ãþÇđ âÞ¢Đæ ǎB€Ðëf ảhf]

I had a job calculating sales taxes. It began with a monthly 100,000 line data file which was only accurate to jurisdiction name and zipcode. It had to use Census Bureau data to calculate the longitude and latitude of an address, then use other census Bureau data to determine if that was inside the city limit. Very few companies can afford to develop and maintain that kind of system, and I would bet that any detailed audit would find half the taxes collected were inaccurate by a small amount, due to some mosquito abatement district, hospital district, or other small district having its own unique borders unrelated to cities or zipcodes.

The alternative is commercial tax calculation services. You send them an address, type of goods (food, fuel, etc, around a thousand choices IIRC), and date (because taxes not only change over time, but jurisdictions have impromptu tax holidays, like going back to school), and you get back tax info per jurisdiction, which are sometimes separate and sometimes combined as to where you send payments. We paid a bulk flat rate; I believe the per-calculation rate is 5-10 cents each. But the real expense is having to write code to interface with these commercial systems, and it adds several second delays.

Far as I’m concerned, the Supreme Court mandating tax based on the buyer is really stupid. No brick and mortar store cares where the customer is from; why should internet stores? Base it on where the headquarters are or the incorporation location, one standard rate for all purchases. Of course all the buyers’ states would howl at all that “lost” tax revenue, and statists would howl about competition among states who lower their taxes or provide special deals to bribe companies to relocate, and I say Good!

[hoppy025]

How else are states and local governments going to pay for all the ambalamps trips and pensions for union thugs?

[Brett Bellmore]

I think you’ve got this exactly right, and I’d focus on a key point: Governments have jurisdiction over the actions of people who are actually within their territory.

If I create a website providing some service, such as checking PCB designs, say, and I and my server are located in Nebraska, I am quite straightforwardly subject to Nebraska law. If a customer in Ohio accesses that website from their home in Ohio, they are equally straightforwardly subject to Ohio law.

But they are not in Nebraska, and I am not in Ohio. And what occurs between us is about as pure an instance of interstate commerce as you could possibly ask for. Literally nothing but information and money is passing between us.

Why, then, should I have any concern with Ohio law? That’s on my customer, just as my customer has no reason to have an interest in Nebraska law. Neither of us is subject to the others’ jurisdiction.

It gets somewhat more complicated if physical goods are being exchanged, but for informational goods it seems rather simple.

[David Welker]

Well, what about if you use cloud computing and your data happens to be physically in some other state due to the decisions of your cloud provider?

[Longtobefree]

And as importantly, you may not even know where “your” data is?

[BravoCharlieDelta]

The concept of nexus should be clarified.

Just because your data maybe in in State XYZ do you really have a nexus there?

Let’s make a physical analogy. Let’s say you sell on Amazon and use Amazon’s fulfillment services. They distribute your goods to their warehouse network in dozens of states.

You have physical goods in these states, do you now have a nexus there and subject to commerce and license laws?

I know they took care of the sales tax collection with technology and legislation. But before that it was an incredible burden. It would take me hours and hours to just to compile and file the sales tax reports for WA state.

[Dilan Esper]

That would be true if your Nebraska business actively refused to sell to Ohio.

But if you decide to make money from Ohio residents, I’m sorry, you are subject to Ohio law unless Congress preempts it or Ohio law discriminates against foreign commerce.

[Brett Bellmore]

But that’s exactly the question: SHOULD Ohio law bind companies doing business in Nebraska? I say, no.

[hoppy025]

Why? Other than putting a product into the hands of UPS or FedEx that will ultimately go to someone in Ohio, what have you done in Ohio?

[hobie]

I say the sale happened in Nebraska. So it’s laws control

[Dilan Esper]

That would be true if your Nebraska business actively refused to sell to Ohio.

But if you decide to make money from Ohio residents, I’m sorry, you are subject to Ohio law unless Congress preempts it or Ohio law discriminates against foreign commerce.

[Bored Lawyer]

That is a true statement of the current law as far as it goes. But given the great interconnectedness achieved by the internet, and the potential exposure to many sets of laws, the practical, aggregate effect is to make interstate (indeed international) commerce more difficult. In a prior era, the Supreme Court might have expanded the Dormant Commerce Clause to cover this situation. Under the current thinking, it is up to Congress to do so.

[Voize]

the practical, aggregate effect is to make interstate (indeed international) commerce more difficult

Before the Internet, to sell your product other than locally you would generally (1) advertise in some remote jurisdictions, (2) make arrangements to take orders remotely (maybe by telephone or mail), and (3) make other arrangements to ship your product to your customer. Those steps would supply the International Shoe nexus sufficient to make you (4) subject to the laws of that jurisdiction. If you didn’t make those efforts but your product ended up in that jurisdiction anyway (a customer took it there, for example) you would not be subject to its jurisdiction (cf. World-Wide Volkswagen Corp. v. Woodson, 444 US 286 (1980)).

Now comes the Internet, and (1) is easier, or at least cheaper, it doesn’t require taking costly out ads in newspapers or billboards or mounting telephone or mail campaigns. (2) is easier too, for both the merchant and the customer. (3) is easier for digital goods, but not for physical ones. (4) though is neither harder nor easier: In all the jurisdictions where you choose to do business, you have to pay attention to the law there, just like before. It might seem harder, relatively speaking, but only because everything got easier except for (4).

[Absaroka]

“But if you decide to make money from Ohio residents, I’m sorry, you are subject to Ohio law”

Let’s explore that assertion.

I run Acme Widgets in Nebraska.

1)Someone from Ohio walks in and buys a widget. I just made money from an Ohio resident. Must I collect the Ohio tax and ensure that the widget is legal for the purchaser to take back to Ohio?

2)Someone from Ohio calls me up (from a phone in Iowa), buys a widget, and tells me to set it out on the loading dock with his name on it and a buddy will swing by and pick it up.

3)He says set it out on the loading dock with his name on it and a label that says ‘UPS – Freight Collect’ and someone will pick it up and deliver it to him.

4)Instead of Freight Collect, he wants to pay me $5 extra, and prepay the freight for him.

Do you think Ohio can control all those transactions (i.e. collect tax, ban items, etc), or only some?

Once you are allowing Ohio to make crimes out of things that happen outside Ohio, can Ohio prosecute Ohio residents who patronize the Bunny Ranch in Nevada, as well as the hookers (who are, as you say, making money from Ohio residents)?

Idaho is really going to appreciate being able to imprison doctors who perform abortions in WA for ID residents.

[Dilan Esper]

Nice policy arguments you got there. The Constitution says nothing about it as long as Ohio’s rules are nondiscriminatory.

You are welcome to contact the legislature though.

[Absaroka]

Let me rephrase:

Do you think the constitution allows Ohio to control all those transactions (i.e. collect tax, ban items, etc), or only some?

[Bored Lawyer]

The Constitution says nothing about it as long as Ohio’s rules are nondiscriminatory.

Wrong. The Due Process Clause requires some nexus before a state can impose its laws. Allstate Ins. Co. v. Hague, 449 U.S. 302, 312–13 (1981) (“[I]if a State has only an insignificant contact with the parties and the occurrence or transaction, application of its law is unconstitutional. . . . [F]or a State’s substantive law to be selected in a constitutionally permissible manner, that State must have a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.”)

Scenario 1, above, is IMO not sufficient Constitutionally for Ohio to impose its laws and tax collection. Probably same for Scenario 2. Not sure about 3 and 4.

[Absaroka]

Thank you.

To my knowledge no state tries to collect from the vendor for scenario #1. Some states (WA is one) have a ‘use tax’ where residents who buy stuff outside the state and bring it back are supposed to pay tax on it as if purchased in state. They do collect that for big ticket items they find out about, e.g. vehicles. IIUC you are supposed to file a return for all such stuff, but I think compliance is negligible.

#4, I think, is the normal way e-commerce works – you pay the vendor for the merch and shipping and the vendor arranges shipping[1]. But not always … for things that are big enough it’s common for the vendor to ship freight collect, where you pay the vendor for the goods and a trucking company picks them up and you pay the trucking company on receipt.

[1]there are variations on that theme as well … I am a WA resident, and we have a cabin in MT. When I buy stuff at a brick-n-mortar in MT I pay MT tax. If I’m at the cabin and order from amazon for delivery to MT, can WA insist on taxing that because “amazon is making money from a WA resident” on that transaction. Can MT and WA both tax the same transaction? If the order is shipped from a warehouse in CO, why can’t CO get in on the action?

I gotta say, Brett’s ‘the states authority stops at the state border’ formulation simplifies a lot of things.

[Dilan Esper]

Due process only kicks in if some state with no connection to the dispute attempts to apply its laws to it.

Shipping to or selling an article of commerce in a state is a voluntary accession to the place’s laws. So that theory gets you nowhere in this context.

[Bored Lawyer]

Did you even read the scenarios?

[David Welker]

The basic logic of Post’s argument is correct.

To the extent we were to require compliance with the laws of 50-states, that is just too much to know for any one individual.

However, there is a practical response. Software created by a third party could embed domain knowledge that would enable such compliance across all 50 states.

So, maybe this is really a practical question. To some extent, complying with the laws of even one state is too much for a single individual. Businesses are going to tend to either need legal advice or use software that helps them comply with the laws of even one jurisdiction.

So, ultimately, there are going to be compliance costs either way. The question is, can we get 50-state compliance software whose price is reasonable?

I don’t love the idea of businesses being dependent on compliance software, on one hand. But the alternative seems to be denying states their traditional roles in regulating commerce. And it does seem that there are compliance costs either way.

So, this is a genuinely hard issue. Overall, even though Post has made a good argument, I lean towards Volokh/Goldsmith. It is worth some money to enable states to maintain some of their existing role in regulating business taking place within their borders. But I think that cost ought to be comparable to what a business would need to pay to do business in a single jurisdiction.

I think Post’s point is correct. Geolocation, while necessary to decrease the burden, isn’t enough. However, the Volokh/Goldsmith argument has force by observing that geolocation technology can be combined with software that enables compliance. But I don’t know that such software currently exists, but it certainly would come to exist if the Volokh/Goldsmith approach was adopted. Over time, we would expect such software to become relatively cheap. But what about in the meantime? And might this not result in a small number of companies emerging to dominate the market in compliance software? And wouldn’t the practical necessity of dealing with such a small number of companies to meet regulatory requirements be problematic in its own way?

[John F. Carr]

Sales tax software exists because tax is a nearly universal burden for online sellers and the tax collection bureacracy has an incentive to help. Who is going to bother researching whether minors are allowed to buy “Bert and Elmo’s drag queen fisting story hour” in West, Texas, and all the other states, counties, and home rule municipalities of the United States? Often the answer will be “maybe”, unlike sales tax where the answer is usually a number.

[Bruce Hayden]

The thing about sales tax software is that it can, essentially, be rolled into the cost of goods sold, just as is the cost of processing credit and debit cards. Instead of, say, allocating 3% of sales to processing costs, you might allocate 3.1%. You can’t do this with other things nearly as easily.

But I too see bigger problems with states regulating everything else. States (and smaller jurisdictions) may try to regulate a lot of other stuff, and in many cases, it’s going to be quite hard to figure out the rules and laws at lower levels. Take speech. Sure most stuff will be protected by the 1st Amdt. But what happens if CA declares a compelling state interest in preventing harm to its citizens by banning speech that will increase vaccine hesitancy, while FL bans false claims of vaccine efficacy or safety on the grounds that the vaccines can and do kill? Both states can claim compelling state interests (health and welfare of its residents). Can they make a good argument about being narrowly tailored, etc? Could one of these laws or regulations survive 1st Amdt scrutiny? Who knows? There are other things that might skirt the 1st Amdt – e.g. privacy laws, trademark/trade dress, etc.

[Martinned]

Sales tax software exists because tax is a nearly universal burden for online sellers

Which is just another way of saying that a complicated sales tax system discriminates against out-of-state sellers. (Which is what us EU law people call a “measure having equivalent effect” to an import levy.)

[Ridgeway]

Huh? Intra-state sellers are subject to the same confusing/hard-to-find local sales tax regs as out-of-state sellers. The state sales tax is the “easy” part.

[Martinned]

Intra-state sellers only have to deal with one set of (tax) laws, so less need to spend $$ on specialised software.

But yes, weird local taxes and other laws can also be a constraint on trade between different parts of a given state. That’s also bad, just not a (Federal) constitutional issue.

[mydisplayname]

That “intra-state sellers only have to deal with one set of (tax) laws” is not true. There are more than 3,150 tax jurisdictions in our union of 50 United States of America (and a table of 5,000 jurisdictions will cover all current tax jurisdictions in the world). Beyond that, there are innumerable “petty” jurisdictional laws which must be considered, including some that are arguable: current service-based approaches to sales tax (for example) ignore the fact that their own interpretation may be incorrect or unwise.

Interestingly, the problem of jurisdictional sales tax and wage/hour laws was an an issue _before_ the Internet. Cornell University’s graduate hospitality management program (David Sherwyn??) has extensive information on the topic.

[Krayt]

States just want the money. An extra line on a warning lable is just the cost of ginning up a reason to get in the way.

[Brett Bellmore]

As noted, the sales tax software exists, but it is NOT cheap, it’s not affordable for small businesses. So, kiss small online startups goodbye?

And, as Carr points out, once you move beyond taxes, into more general regulation, there’s nothing out there to help you. It’s a nightmare even to large companies.

[David Welker]

If it isn’t cheap, it probably should be. The marginal cost of distributing knowledge about the correct sales tax for a particular address is practically zero. Obviously, building the software that does this (and updating it as laws in many jurisdictions, including cities and counties) isn’t cheap.

If it isn’t currently cheap, it seems like there is a business opportunity here. Or I guess you can sell your stuff on Amazon and let them collect the sales tax for you.

[TwelveInchPianist]

It’s not just states, cities and counties. Maybe North Carolina has a special zone where there’s a reduced tax rate on fish-farming supplies for people who have been in the fish-farming business for more than 5 years, or whatever. Your service has to know all of that stuff. There’s crap like that all over the place.

[Stephen Goldstein]

I’m wondering how we’re so sure that we Know where the transaction took place . . . .

In the old days, I’m standing in the coffee shop in WA.. I hand the barista my money and s/he hands me my drink. The transaction took place at the counter over which the money and the coffee crossed. And in the old, old days, prices for “mail order” items were FOB (Freight On Board) [city of origin] and the buyer would pay the shipping charge on delivery.

Today, for Internet sales isn’t it arbitrary to say that its the buyer’s location that determines jurisdiction?

The merchant and I are sitting at our computers. I enter my order and in my state, the merchant accepts and orders a “drop shipment” from another state for delivery to me in a third state. Was this transaction executed at exactly one location? And if so, at which of the three locations?

[Mr. Bumble]

“…items were FOB (Freight On Board)…”

That should be Free On Board.

[John F. Carr]

That particular hypothetical is a very minor problem. The seller charges the regular tax rate and fish farmers file with the state for a refund. It’s the opposite situation that gets you in trouble, an extra tenth of a percent on fish-farming supplies in a particular district and your database doesn’t know about it.

People who use tax calculation software – do you have to cut a check to every little mosquito abatement district for the $5 of sales tax you collected, or does the state distribute it for you?

[Absaroka]

“… the correct sales tax for a particular address…”

Just to muddy the waters, you are assuming a physical address. Physical goods will presumably be delivered to a physical address, but what about virtual goods?

If I send my PCB design to Brett’s company while airborne over Idaho, and he returns the analysis as my flight is crossing Tennessee. Who gets the sales tax? If he is selling furry porn instead of design services, which state’s porn rules apply?

[Á àß äẞç ãþÇđ âÞ¢Đæ ǎB€Ðëf ảhf]

It CANNOT be cheap. There are 100,000 taxing jurisdictions in the US, most of whose borders do not align with zipcode and require complex longitude and latitude calculations, if that data is even available; census bureau data can approximate lon/lat from street addresses, and provides lon/lat polygon coordinates for cities, but not for the vast majority of those tax jurisdictions. They declare temporary tax holidays, and the commercial services have 1000 different product categories which affect tax rates. All this info changes whenever they feel like it, so frequent updates are vital.

[David Post]

It CANNOT be cheap.
This discussion about sales tax software is very interesting. G/V use sales tax collection as an example of how well the system can absorb geographically-varying obligations on website sales. I had/have a suspicion that they’re underestimating the actual difficulties/costs of installing and maintaining tax compliance software (and geolocation systems as well), but I really don’t know anything about the subject and didn’t feel like I had the time to go down that research hole. But much of this discussion is helping to re-confirm my initial suspicions.

[Rossami]

It is not cheap. And if you think it so obviously should be, I strongly urge you to take up that business opportunity yourself. Put your money where your mouth is.

Maybe you are the genius who can figure this out where no one else has been able to. I suspect, however, that you will discover exactly why it’s harder than you think.

[hoppy025]

That’s exactly the reason the Amazon and Walmarts of the world support all the leftist boondoggles like “living wages,” “national sales taxes” and everything else. Because they can afford it, and their small business competitors can’t.

[Á àß äẞç ãþÇđ âÞ¢Đæ ǎB€Ðëf ảhf]

However, there is a practical response. Software created by a third party could embed domain knowledge that would enable such compliance across all 50 states.

If it were just 50 states, it would be manageable. But it’s not. Not only do cities and counties have their own sales tax rates, there are mosquito abatement districts, hospital districts, stadium districts, and so on; some 100,000 different sales tax districts in the US, if memory serves.

All those little districts have unique boundaries which so not align with zipcodes.

Many, maybe most, sales tax districts have tax holidays once in a while, such as going back to school. They also change rates willy-nilly, requiring frequent data updates.

Different jurisdictions have different tax rates for different product categories, such as food and fuel. Some organizations are exempt from certain taxes, such as fuel for farmers and school supplies for schools.

Canada has two sales taxes: national and provincial. Two of the provinces apply their tax on top of the national taxes. The rest apply their tax only to the product price.

People like to point to the EU VAT as nice and simple. They aren’t. There are something like 100 different product categories, and every EU member has different rates for all those categories, and different exemptions for different organizations. Further, advertising a single price for the entire EU means differing profit in different countries because their VAT rates range from (from memory) 10-25%.

[MatthewSlyfield]

“Not only do cities and counties have their own sales tax rates”
They may also have their own and different lists of what is and isn’t taxable.

[Longtobefree]

Sadly, these arguments will be used by the fascists to justify requiring all online access to go through government servers that will attach an “official” geographic identifier “for the convenience” of the user and the businesses.
Sooner or later – – – – – – – –
Sooner if the democrats retain control of the executive branch.

[Bored Lawyer]

Somewhat related to this discussion, I recently came across a case involving copyrights, Dow Jones & Co. v. Juwai Ltd. (SDNY 2023). https://casetext.com/case/dow-jones-co-v-juwai-ltd-1

Dow Jones owns a number of publications, including the Wall Street Journal. Defendant is a Chinese based company that is accused of copying and posting over 100 copyrighted articles on its site. Copyright law (like most federal law) is presumed to apply only within the US.

Court holds that allegations that Juwai caused the copies to be loaded to the cloud through a company named CloudFront, whose servers are located in the US. That was enough to apply US copyright law to its activities. At least to avoid a motion to dismiss.

While the Dormant Commerce Clause is not implicated here, the case does seem to hold that the use of US servers to host content suffices to apply US copyright law to the activities (which inevitably involve copying of content, thus possibly triggering the Copyright Act.)

So these issues have an international dimension as well.

[David Post]

Court holds that allegations that Juwai caused the copies to be loaded to the cloud through a company named CloudFront, whose servers are located in the US. That was enough to apply US copyright law to its activities. At least to avoid a motion to dismiss.
Notice the irony. On the one hand, courts will say: “If you’re sending your communications into jurisdiction X, jurisdiction X can apply its law to your activities regardless of where you, or your server, are located.”
And in this case, it says: “Jurisdiction X can also apply its laws to your activities if your server is located in jurisdiction X, regardless of where you send your communications.”
That pretty much covers everybody on the planet. I guess courts, like other businesses, want to expand their market share, and this is one way to do it. But it’s a bit disheartening.

[DRM]

Yes, the Supreme Court royally screwed up in South Dakota v. Wayfair, Inc. by deciding online transactions took place where the customer was located instead of where the seller was located. But that’s the case law now.

[Martinned]

Usually people around these parts believe that the Supreme Court should decide cases based on the original meaning of the constitution, the text of the statute, and other first principles, rather than based on what is convenient on the day. If this stuff is inconvenient for online sellers, maybe Congress should step in and make a law that imposes one single tax on online sales?

[Brett Bellmore]

Based on original meaning, wouldn’t the appropriate response be that, if the seller does not step foot in a state, compliance with the purchaser’s state law is all on the purchaser?

I suppose that the federal government could, constitutionally, impose a sales tax. But I don’t see any basis for it over-riding state and local sales taxes; It would just be in addition to them.

[Martinned]

The logical corollary to striking down a state law under the dormant commerce clause is that there is a federal power to enact law to govern the issue instead. If a certain type of state sales tax violates the dormant commerce clause because it discriminate against out of state (online) sellers, as we might assume for the purposes of this discussion, then the logical conclusion is that Congress must have the sole power to tax interstate (online) sales.

Whether that is actually right is a more difficult matter. I should think that taxing interstate sales is the very definition of regulating interstate commerce. As per McCulloch v. Maryland, if you can tax it you can stop it, and the power to stop interstate commerce belongs to Congress alone.

But that ship has sailed a long time ago. As for whether the Supreme Court was right to hold as it did, as an originalist matter or otherwise, that’s a question I’ll gladly leave for another day. (E.g. after I’ve read that judgment.)

[Dilan Esper]

The original constitution called for post offices and roads. So interstate shipment of goods was always a possibility, and the original meaning was that sellers would be subject to nondiscriminatory laws of the jurisdiction they shipped/sold to.

[Rossami]

No, sellers were responsible for the laws of the jurisdictions they shipped from. If that was a problem in the recipient’s jurisdiction, that was the recipient’s problem.

[Dilan Esper]

Incorrect. For example, if Virginia prohibited the sale of a particular thing as contraband, you couldn’t go to Maryland and then sell it by mail order into Virginia.

[Gandydancer]

You’re full of assertions made without evidence. Do you actually have a case of a Maryland seller punished for selling a Maryland-legal item to someone in Virginia?

[Rossami]

Sure you could. Or more precisely, there was no legal basis for Virginia to prosecute you in Maryland for that action. Virginia could a) prosecute the buyer or b) intercept the shipment at the border but had no authority to hale the Maryland merchant into VA court.

[DRM]

Usually people around these parts believe that the Supreme Court should decide cases based on the original meaning of the constitution, the text of the statute, and other first principles, rather than based on what is convenient on the day.

Yes, that’s exactly why the Court’s ruling in South Dakota v. Wayfair, Inc. was a screwup. It decided that because states collecting a specific kind of tax from their own residents was inconvenient to the state, a state would be allowed to demand the compliance of people who had never set foot in the state.

[Martinned]

Interesting. I assumed it would have been some kind of logic like “the location of a contract is the place where the essential step is performed, and the essential step in selling someone an item is actually handing it to them” (apologies, I forgot the correct terminology).

Legal textbooks on international private law are full of stories about someone standing on one side of the Rhine shooting someone standing on the other side, etc. It’s always messy.

But if the Supreme Court took the pragmatist’s way out, they get little sympathy from me.

[Bored Lawyer]

“Legal textbooks on international private law are full of stories about someone standing on one side of the Rhine shooting someone standing on the other side, etc.”

U.S. legal textbooks often contemplate someone standing on one side of a state border and shooting someone on the other side. Or, more colorfully, the NY Legislature, in amending its long-arm statute, contemplated someone standing in NJ and lobbing a missile into Manhattan.

[Michael P]

Meanwhile in Texas, shots fired across the Rio Grande need to be reported not as hypotheticals, and also not as repeating reportage from the previous year or even the previous week.

[Rog1]

I routinely use a VPN when cruising the web. It’s just one of several methods I use to protect a tiny bit of my privacy. Last night my location was Utah, which is not where I am. I did have to agree to some Utah silliness. I didn’t read the text; I just clicked OK. Today I’m in Colorado. Tomorrow I think I’ll try New Mexico. The more foolish the proposals to attempt to regulate the Internet, the more I enjoy circumventing the stupidity. Haven’t logged in from France lately, but may later today.

[Alphonse Tomato]

Indeed. I also use a VPN, and today I am in Luxembourg. Tomorrow it might be Ottawa or Argentina or Oklahoma. And while all of these will geolocate to the indicated place, some have servers actually located somewhere else (the ostensible location is just where that IP number is registered). There’s a virtual location in all 50 US states, but only 3 or 4 physical data centers. I don’t even know where, maybe someone who is good with the TRACERT command could figure that out. Having physical goods shipped does narrow it down some, though I might use my PO box or nephew’s street address in adjoining states.

[Old Smokin' Egg]

The Goldsmith-Volokh argument seems to turn on a definition of the place of transaction (and therefore taxation) as the customer’s place of residence: “…which states users are coming from”. Could this argument also apply to real-world physical transactions?

Suppose that in order to incentivize people to switch to electric vehicles, Illinois imposes a special sales tax on repairs done to cars with internal-combustion engines. The tax is heavy enough that a great many Chicagoans drive to Kenosha or Gary when their cars need major repairs. Illinois then demands that repair shops in other states collect the tax and remit it to Illinois when work is done on cars with Illinois license plates.

Determining whether a car comes from Illinois is no major burden for the mechanic; it only requires a glance at the license plate. Given the ease of doing so, could Illinois require out-of-state mechanics to collect and remit this tax?

[Mr. Bumble]

Would that be commandeering?

[Martinned]

The relations between different states aren’t commandeering. That’s a term we usually use for the relationship between the Feds and the states.

[Brett Bellmore]

Only if they were doing the work in Illinois.

[John F. Carr]

This is similar to Town Fair Tire Centers v. Commissioner of Revnue, 454 Mass. 601 (2009). The Supreme Judicial Court of Massachusetts ruled that a tire shop was not responsible for collecting tax on sales in New Hampshire to Massachusetts residents. The shop was at least on constructive notice because the billing address was in Massachusetts and the license plate was from Massachusetts. The corporation that owned the shop did business in both states.

[ReaderY]

Professor Post’s argument illustrates the case for abolishing the Dormant Commerce Clause.

These are policy arguments, arguments that centralization is more efficient.

But efficiency always has to be balanced against contrary policy considerations. Suppose a single hamburger plant served the entire country, everything mixed in one giant vat. It would maximize efficiency. But a single diseased cow could comtaminate the entirw meat supply and make the entire sick. And if the single giant plant broke down, the entire country would go without. Redundancy is always less efficient when everything goes well. But it aids survival when things go haywire. As the hamburger plant example illustrates, Balkanization with multiple smaller local hamburger plants limits the spread of contamination and ensures back-up exists to fill gaps if one breaks down.

The Irish potato famine is a salient example of the downsides of standardization. Sure it was more efficient to make everyone’s diet to depend on a single plant species. Sure it made food a lot cheaper. But the famine richly illustrates how brittley efficiency can depend on everything going well, and hence the fallacy of making efficiency a society’s only goal.

Thus the question of how efficient to make things, how much to make national and jow much to leave local, is always a policy question. It involves tradeoffs similar to setting a speed limit, where higher gets people there faster and is more efficient when things go well, but lower increases peoples’ survival chances when things go badly.

The Dormant Commerce Clause is judge-made law. The Constitution itself lets Congress make the necessary tradeoffs. The Constitution itself should favor neither side of these tradeoffs, that’s for political branches to make. The Constitution limits Congress’ powers as a federalism matter, but it gives federal courts no independent power to devise and implement their own policy preferences. I don’t think judges have any more business saying the constitution prefers centralization to balkanization than they have saying the constitution prefers high speed limits to low ones. Law school professors and judges are entitled to their own policy preferences. They may prefer efficiency to redundancy and survivability. But the Constitution itself has no such preference.

If it’s good policy, Congress can simply pass a statute making the current Dormant Commerce Clause doctrines law. And if Congress doesn’t want to do so, maybe it isn’t good policy. In any event it should be Congress’ decision.

[Martinned]

But efficiency always has to be balanced against contrary policy considerations.

Wow, what an amazing discovery! If only someone had thought of that before you!

Article 34
Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.

Article 36
The provisions of Articles 34 and 35 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.

But seriously, from the First Amendment to everywhere else US jurisprudence is always way too categorical. Everything is black & white. And because reality isn’t that convenient, the courts end up hiding all the judgment calls in mountains of words, while the poor lawyers end up litigating to high heavens over whether something is subject to strict scrutiny (=government loses) or intermediate scrutiny (=government wins).

[Longtobefree]

Any commonality with localities who tax the income of remote workers who provide labor to companies in the locality?

[Martinned]

Don’t they have withholding taxes in the US?

[John F. Carr]

That’s how the taxes are collected. New York City (for example) takes a bite out of my paycheck. If I never set foot in the city and never file a city tax return the city still has my money.

[Á àß äẞç ãþÇđ âÞ¢Đæ ǎB€Ðëf ảhf]

As a semi-related bit of humor, we discovered one day from a customer complaint that San Francisco, and presumably certain other cities, have special tax-free zipcodes for embassies, consulates, and some import-export businesses. They are apparently fake zipcodes which do not affect delivery. You use your real street address but use the tax-free zipcode, pay no tax, and incur no delivery delays or confusion.

Always wondered what the tax authorities do to detect such fraud. I imagine they don’t appreciate the humor of it.

[John F. Carr]

You can also give the seller a tax ID number of an exempt organization. There is a risk that an audit will find you out.

When I did this the seller wanted a standard form filled out with information in addition to the number. I got a filled-out form from the appropriate office. More recently I have seen a spot on a web form to enter only a number.

[anon_e_moose]

Most social media websites rely on advertisements and selling/collecting user data. Those ads/data collection almost always specifically target and utilize the fact of what state the customer accessing the website is located in (as determined by IP geolocation). Isn’t that purposeful availment?

[Michael P]

Purposeful availment by whom? The advertising network? The advertiser? The social media site? (For the sake of clarity, assume these are all different entities.) Someone else?

[Rossami]

You are making some very sweeping assumptions about business behavior. Some target based on state. Many (I’d venture to say, most) others don’t.

[VinniUSMC]

This is the most interesting and thoughtful post/comments in a long while. Cheers! Reminds me of VC before WaPo.

[David Post]

This is the most interesting and thoughtful post/comments in a long while. Cheers! Reminds me of VC before WaPo.
I completely agree! Quite an enlightening discussion indeed, and blessedly free of invective and ad hominem stuff.

[wnoise]

Not culture war helps a lot.

[A nerdy Fred]

The analogy to brick and mortar stores fails on a simpler and more fundamental basis. The historical analogy for someone like Amazon is the Sears catalog of bygone days. Imagine if Tinytown, CA had banned the sale of lawn darts before the Federal ban but hypothetically they were in the Sears catalog.

Now, if there was precedent that Sears was liable under the rules of every jurisdiction where they had customers, that’s relevant.

[Archibald Tuttle]

It is vastly more complicated than state-to-state commerce. The Internet is global.

Imagine a China imposing Chinese law on Americans. Case 1 where the business is in China, but the customer in the USA. Case 2, the business is in the USA, but the customer in China.

Suppose a Muslim country forbids showing images to their citizens that represent people or animals?

Both the EU and the USA have had some success with extraterritorial reaching laws. I can’t imagine either of them recognizing third world laws enforced against them.

[mydisplayname]

The comment by Old Smokin’ Egg is interesting: “The Goldsmith-Volokh argument seems to turn on a definition of the place of transaction (and therefore taxation) as the customer’s place of residence: ‘…which states users are coming from’. Could this argument also apply to real-world physical transactions?”

Consider the bodega in northern Virginia which sells several items to a homeward-bound District of Columbia resident and places such sold items in a small plastic bag. Should the bodega take note of its customer’s residence and charge the $0.05 DC bag tax? If charged, should the tax be remitted to DC or to Virginia (which also has a bag tax under certain circumstances and is always willing to accept taxes)? Is it the DC customer or the VA business which is responsible for compliance with the DC bag tax?

Now, consider that same northern Virginia bodega selling the same items to the same District of Columbia resident physically present in the bodega and placing those items in a plastic bag (just as Amazon does) but this time entrusting the bag to the United States Postal Service for delivery rather than handing it to the physically-present customer. Should the bodega take note of its customer’s residence and charge the $0.05 DC bag tax? Is it the DC customer or the VA business which is responsible for compliance with the DC bag tax?

As noted during the Obama/Pelosi PPACA discussion, an individual or business may be neither desirous of nor cognizant of participation in interstate commerce. Are we at a point where we are asked to conclude that all commerce, no matter how local, is interstate commerce?

[Michael P]

I hate to spoil a good hypothetical, but most of northern Virginia has their own $0.05 bag tax: https://www.tax.virginia.gov/disposable-plastic-bag-tax

[Gasman]

It is akin to the legal fiction of the remote practice of medicine having a location where the ‘visit’ occurred.
Pathways for patient care that did not require patients to come to my office were expanded during the start of Covid lockdowns. This was great for simple follow up and consultation that did not benefit from the laying on of hands.
But quickly the states reinforced legal restrictions regarding where the practice of medicine was occurring. So we had to facilitate patients traveling at least into my state, or a state where I hold a license. And every clinical note begins with ‘during this encounter the patient was located within X state…’ I would naturally accept the patient’s self-identified location without judgement so long as it was the right self-identification.

[Stephen Goldstein]

You are correct and I thank you for the reminder which, incidentally, answers my question . . . .

When the terms were FOB origin, the seller was asserting that the transaction was complete when the goods were delivered and on-board the conveyance at which point title was transferred to the buyer. This meant, for example, if the goods were damaged in shipment the buyer could take it up with the shipping company.

This is still used today but don’t generally apply to the kind of Internet sales being discussed here.

Today, although we’re not using the words, these Internet sales are like FOB Destination – yes, shipping charges were paid by the buyer but it was the seller who arranged/contracted/paid for transport.

Here, seller retains responsibility until the goods are at my location at which point title is transferred so, I guess, that IS the location of the transaction.

[Absaroka]

“seller retains responsibility until the goods are at my location”

That has been the norm, IMHO – if the goods I order from Amazon go astray I call up Amazon and they reship. I’m not sure that is a legal requirement, though – I occasionally encounter businesses who say once it leaves their loading dock they wash their hands of it; I can talk to UPS if it goes astray or is damaged.

[Bored Lawyer]

BTW, I must say this is one of the best posts and discussions in a long time. No political sniping, no haughty insulting of a portion of the posters, no logical fallacies, no snark. Just serious discussion of the legal and policy issues in the OP. This is why I come to VC.

[David Post]

I completely agree – very enlightening discussion, on many fronts. Great stuff. I think I’m going to put a little note at the beginning of the post to suggest to readers that they look through the Comments.

[jdgalt1]

I agree with what I read to be the intended thrust of this article: an Internet connected business should be considered to be operating where it (the business) is physically located, and nowhere else. If Ohio wants to tax something that a Nebraska business sells through the mail, the courts should tell Ohio no, because the sale of the item is interstate commerce. Even to collect use tax is an express violation of Article I, Section 10, paragraph two. (“No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.”)

A state may ban a particular product or service (with some exceptions, for instance, a publication) regardless of where it comes from, but in such cases I would not uphold criminal liability against an out-of-state business that shipped it, if it’s legal in their state.