In South Dakota v. Wayfair, Inc., et al. (2018), the U.S. Supreme Court ruled that a state can require sellers with no physical presence in the state to collect and remit state sales taxes. The decision overruled National Bellas Hess, Inc., v. Department of Revenue of Illinois (1967) and Quill Corp. v. North Dakota (1992), which held that under the Dormant Commerce Clause states could not tax sellers that had no physical presence in the state. These decisions had allowed internet vendors to sell goods and services free of state sales taxes for decades before the Wayfair decision.
In 2016, South Dakota passed a law intended to challenge Bellas Hess and Quill. The law reflected the legislature’s finding that the inability to collect sales taxes had seriously eroded South Dakota’s sales tax base. The law required out-of-state sellers to collect and remit sales taxes, precisely the activity barred by Bellas Hess and Quill. The law did include a safe harbor provision: it was not retroactive, and it applied only to sellers who delivered more than $100,000 in goods or services into the state or who engaged in 200 or more separate transactions for the delivery of goods and services into the state.
Wayfair, Inc., and two other companies challenged the law’s constitutionality. Each company sold enough goods to South Dakota consumers to meet the law’s requirements, but the companies did not have a physical presence in the state. On this basis, they refused to collect sales taxes. South Dakota filed suit against the companies, and the case was ultimately appealed to the U.S. Supreme Court. In a five-to-four decision written by Justice Anthony Kennedy, the Court set aside the physical-presence rule required by Bellas Hess and Quill.
DORMANT COMMERCE CLAUSE The Wayfair case turned on the Court’s interpretation of the Commerce Clause. This clause, located in Article I, Section 8, of the Constitution, grants Congress the power “to regulate Commerce . . . among the several states.” Although the clause is written as an affirmative grant of authority to Congress, the Court has long held that the judiciary can set limits on the states absent congressional action. Thus, when Congress’s power to act remains “dormant,” the courts have filled the gap with rules that curtail the states’ ability to interfere with the free flow of interstate commerce.
MAJORITY OPINION In the Wayfair opinion, the Court noted that modern Commerce Clause precedent rests on the principles that a state cannot: (1) discriminate against interstate commerce, or (2) impose undue burdens on interstate commerce. The Court also affirmed that states can tax interstate commerce as long as the tax does not create any effect forbidden by the Commerce Clause.
The Court pointed out that the physical-presence rule upheld by Bellas Hess and Quill had been a target of criticism for decades. The Court expressed concern that the physical-presence rule put sellers with a physical presence in a state at a disadvantage relative to remote sellers. The Court asserted that the earlier decisions had set up a “judicially created tax shelter” for businesses that intentionally limited their physical presence in a given state. The market distortions created by the rule, the Court noted, had resulted in unfairness to some sellers and significant revenue losses to the states.
The majority also suggested that the development of the internet had left the physical-presence rule increasingly removed from economic reality. The Court noted that the immediate access that businesses had to consumers through any internet-enabled device meant that a business could be present in a state in a meaningful way without that presence “being physical in the traditional sense of the term.”
In Quill, the Court had expressed concern that states would unduly burden interstate commerce by requiring sellers to comply with the unique demands of thousands of different taxing jurisdictions. The Wayfair majority dismissed these concerns, asserting that in the modern internet economy, such worries were unrelated to whether a company happened to have a physical presence in a state.
Some sellers, the Court noted disapprovingly, advertised the lack of sales taxes as an incentive to consumers: “There is nothing unfair about requiring companies that avail themselves of the states’ benefits to bear an equal share of the burden of tax collection.” To do otherwise, the majority argued, would undermine public confidence in the both the tax system and the Court’s Commerce Clause decisions. “In the name of federalism and free markets,” Justice Kennedy wrote, “Quill does harm to both.”
The Court pointed out that under its Dormant Commerce Clause precedents, the courts, rather than Congress, “have acted as the front line of review in this limited sphere.” Because of this, the Court reasoned, it was Bellas Hess and Quill, and not Congress, that were “limiting the lawful prerogatives of the states.” The majority therefore overruled Bellas Hess and Quill.
DISSENT Chief Justice John Roberts dissented in an opinion joined in by three other justices. He agreed that the Court had erred decades previously in the Bellas Hess case, but he contended that it was not the Court’s role to correct the error because the “potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.” The Court, Roberts wrote, should refrain from ruling on such a significant question of economic policy simply to “expiate a mistake it made over 50 years ago [in Bellas Hess].”
Roberts argued that Dormant Commerce Clause precedent—such as Bellas Hess and Quill—deserved heightened deference because of Congress’s “superior authority” in the realm of Dormant Commerce Clause doctrine. This superior authority, he contended, “counsel[ed] withholding our hand” in deference to possible congressional action.
Roberts noted that Congress had been working on the issue of taxes stemming from internet sales at the time the case was heard by the Court. He contended that the abrupt abandonment of Bellas Hess and Quill might disrupt Congress’s consideration of the issue. The majority, he concluded, had proceeded with an “inexplicable” sense of urgency.
Roberts also echoed the concern of the Quill Court that abandoning the physical-presence rule would unduly burden internet vendors by forcing them to comply with the rules of more than 10,000 taxing jurisdictions across the country. He chided the majority for “breezily disregard[ing]” the impact that these costs could have on sellers.