The doctrine of the “dormant” Commerce Clause tends to be a sleeper issue at the Supreme Court — the stuff of treatises and debates that only keeps legal academics awake at night. Stated broadly, the doctrine holds that the Constitution empowers courts to invalidate state laws that have an effect across state boundaries — since Congress is the only one that can really regulate interstate commerce, state laws that do that and touch on areas that Washington hasn’t bothered with are struck down.
And yet in an unusual 5-to-4 decision that finds two leading conservative justices on opposite ends, the Supreme Court managed to make some noise and rule in South Dakota v. Wayfair that the dormant Commerce Clause doesn’t bar South Dakota from imposing a sales tax on online retailers located out of state. With the justices’ blessing, the door is now wide open for states to begin forcing online retailers to begin collecting taxes and remitting the windfall to their treasuries. One report from the Government Accountability Office estimated that states stood to gain up to $13 billion in tax revenue if Congress ever got its act together and allowed the collection.
But who needs Congress when the Supreme Court can do the dirty work. Leave it to Justice Anthony Kennedy, federalist extraordinaire, to command a majority and overrule two earlier precedents that more or less told states to stay out of the taxing business if the businesses they were seeking to collect from lack a “physical presence” in the state. Turns out Kennedy read the same GAO report I noted above, which he cites in his opinion, and to him the overruled precedents stood in the way and caused states to “lose” tax revenue — a glass-half-empty view of the controversy, if you will. “Particularly because South Dakota has no state income tax, it must put substantial reliance on its sales and use taxes for the revenue necessary to fund essential services,” Kennedy empathized. “Those taxes account for over 60 percent of its general fund.”
To Kennedy, this is a “serious inequity” to a sovereign state, and so the solution is as easy as counting to five: online sales taxes for the whole nation! Curiously, something about Kennedy’s argument must have appealed to Justice Ruth Bader Ginsburg, who jumped over to the conservative wing of the court to help him garner his five-justice majority. Together, they concluded that Wayfair, Overstock, and Newegg, all staples of online shopping and none with brick-and-mortar presence in South Dakota, could nonetheless be required by the state to pay up. “In essence, respondents ask this Court to retain a rule that allows their customers to escape payment of sales taxes — taxes that are essential to create and secure the active market they supply with goods and services,” Kennedy wrote.
In a sense, this is the prototypical Kennedy opinion — it talks a big game about an area of constitutional law or policy he cares about, using language that beckons our better angels. “In the name of federalism and free markets, Quill does harm to both,” Kennedy declares, name-dropping one of the cases he and his colleagues just wiped out from the Supreme Court’s jurisprudence. “The physical presence rule it defines has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.” Those words will be music to the ears of 41 states, two territories, our nation’s capital, and the Trump administration, all of which forgot their red-blue differences and banded together to urge the justices to give South Dakota a win.
Justices Neil Gorsuch and Clarence Thomas, never ones to miss a chance to write separately, jumped in with short musings of their own. Gorsuch was just happy to see the old, anti-states’ rights rulings erased from the books, which in his view amounted to a “judicially created tax break” that could no longer stand: “Today we put Bellas Hess and Quill to rest and rightly end the paradox of condemning interstate discrimination in the national economy while promoting it ourselves.” Thomas, for his part, put pen to paper to renounce his own past views in the 1992 Quill case, noting that “a quarter century of experience” had convinced him that the physical-presence requirement “can no longer be rationally justified.” Without explaining how he changed his mind, he acknowledged that “it is never too late to surrender former views to a better considered position.”
Where Kennedy’s opinion may not be as persuasive, and where the dissenters take him to task, is its reasoning for why the Supreme Court, especially with so much consensus on the need to regulate the online space, is getting rid of two of its precedents. Is stare decisis, the fancy word for the law of judicial precedent, that fungible?
Expect the question to come up again soon. In a matter of days, the Supreme Court should be deciding one of its biggest cases of this term, Janus v. AFSCME, a First Amendment challenge that could cripple the financial livelihood of public-sector unions. That case is all about stare decisis — it rests on the vitality of a 40-year-old ruling that conservatives on the court have been all too happy to chip away at in recent years. Kennedy insists in Wayfair that he’s not so much wiping out precedent as killing a monster of the court’s own making: “It is inconsistent with the Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation,” Kennedy wrote. If public unions go down, I’d expect whoever writes the opinion — probably Justice Samuel Alito, who has written other anti-union rulings of late — to quote that language word-for-word.
But are the realities of the internet and e-commerce enough to overrule yourself? Striking a pragmatic tone, Chief Justice John Roberts — joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan — maintained that it is precisely the permanence and predictability that a bar on online state taxes has brought to the “dynamics of the national economy,” as Kennedy put it, which counsels against changing the status quo in one fell swoop. And no, it’s not enough to simply want to correct past mistakes. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress,” Roberts wrote. “The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.”
(In a brief, Republican senators Ted Cruz, Mike Lee, and others had pressed the court to rule for Wayfair; doing otherwise, they said, “would upset ongoing negotiations in the Legislative Branch.” Roberts credits that brief and one by a group of members of Congress, both of which ponder the myriad ways an abrupt decision could only complicate legislation, if not the economy. As of this writing, online retail stocks were still reeling from today’s decision.)
It’s not hard to imagine how the ruling in Wayfair could end up hitting hard not so much the Amazons and the Walmarts of the world, which already contribute significantly to states’ coffers, but the tens of thousands of small-time sellers who rely on these giants and other online retailers — think eBay, Etsy, and the like — to sell their crafts and wares. “People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale,” Roberts warns. That’s the kind of stuff Congress should be thinking hard about, with hearings, experts, and carefully crafted language that leaves every constituency happy.
In the absence of real action, all we have is the Supreme Court filling in the gaps — leaving states free to experiment with taxation schemes that may well burden smaller online retailers, stripping away the relative ease with which online shopping has functioned and evolved for much of its existence.