"Authority of Law" by James Earle Fraser, in front of the Supreme Court Building, Washington, D.C. Photo by Phil Roeder.When is a historic Supreme Court decision about sales tax not mainly about sales tax? When it’s really about preserving – or overturning – Roe v. Wade, Citizens United, or both.
To understand what just happened at the Supreme Court, we need to think beyond the headlines. Those headlines were simple enough: Last week a 5-4 court majority struck down the central holding of Quill v. North Dakota, a 1992 case that declared a state cannot impose sales tax collection obligations on a business unless that business has a physical presence within the state. The ruling in South Dakota v. Wayfair was a victory for states hoping to force online retailers to collect sales taxes on their behalf.
This is almost certainly not the whole story, nor even the most important story, about the impact of this decision. We can tell from the strange composition of the five-member majority that voted to overturn Quill, and the almost equally curious grouping of four who dissented and would have kept it intact.
Justice Anthony Kennedy wrote the majority opinion. As the typical “swing” vote between the court’s conservatives and liberals, he often gets to write decisions in the most closely contested cases. Sometimes that is the only way to ensure his vote with the majority. But this time, the decisive vote to overturn Quill came not from Kennedy but from Justice Ruth Bader Ginsburg. You can bet something strange is happening any time “the Notorious RBG” is part of a five-justice majority that also includes Kennedy and Ginsburg’s polar opposite, Justice Clarence Thomas, but not her three fellow liberals.
Those three – Justices Sonia Sotomayor, Elena Kagan and Stephen Breyer – joined Chief Justice John Roberts’ dissent. They would have kept Quill intact, even if they believed it should have been decided differently, to honor the judicial principle of “stare decisis.”
Stare decisis asserts that once the courts have settled a precedent, other courts of equal or lesser authority should make every effort to follow that precedent. Wayfair overturns not one, but two previous Supreme Court decisions in the name of fixing perceived missteps in Quill and its predecessor, the 1967 decision National Bellas Hess v. Department of Revenue of Illinois.
Roberts directly stated that he agreed those cases had been wrongly decided; where he differed from the majority was in contending that Congress, not the Court, should correct the problem. “The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago,” Roberts wrote.
If, as Kennedy wrote in the majority opinion, the Court should indeed exercise its power to correct a “mistake” it made 50 years ago and later affirmed, then the “mistake” of Roe v. Wade is in mortal peril. The views of Supreme Court nominees on stare decisis have long been a proxy for willingness to overturn Roe, and it seems unlikely that this was lost on the three liberal justices who joined in Roberts’ dissent.
The marvel is that Ginsburg, a fierce supporter of Roe, did not seem to recognize this danger, although surely a colleague or clerk pointed it out. Or maybe another “mistake” – the way she has characterized the court’s decision in Citizens United – was topmost in her mind instead. Tossing stare decisis to the wind, Ginsburg has called for Citizens United to be overturned almost from the moment the high court decided it, thus allowing corporations and unions to spend money independently to influence election campaigns.
Roberts may have been the only justice whose position in Wayfair did not reflect an agenda involving Roe or Citizens United, or both. My guess is that he was genuinely concerned, as he expressed in his opinion, that the courts are far less suited than Congress to address the problem of how to get millions of businesses to comply with the sales tax requirements of 10,000 different American jurisdictions.
I question whether the liberal justices share that concern at all, but I do believe they are very concerned about keeping the court’s respect for stare decisis at a high enough level to protect Roe. And the court’s conservative justices, with the exceptions of Roberts and possibly Kennedy, may be equally interested in lowering the barrier to reversing the decision that enshrined women’s access to abortion (subject to certain state limits) as a constitutional right. Both Kennedy and Thomas had actually voted with the majority in Quill, only to overrule their own precedent in Wayfair.
None of this is to suggest that last week’s decision is not important in its own right. As I noted in January when the court agreed to take up Wayfair, few individual taxpayers know or care that they are supposed to report and pay “use tax” on online transactions in which they were not charged sales tax. As a result, states lose out on significant tax revenue when residents make online purchases from vendors who don’t collect tax.
South Dakota imposed sales tax collection duties on internet and other out-of-state vendors who have more than $100,000 in annual sales or 200 separate transactions involving consumers within the state. This law was intended to circumvent the prevalent argument that very small or startup businesses would be unduly burdened by an obligation to register with South Dakota and collect its tax. The court majority accepted that position.
The decision in Wayfair may extend beyond the realm of sales tax. Quill and its predecessor, National Bellas Hess, were cases involving sales and use tax, not income or franchise taxes. The principal case controlling franchise tax obligations was Complete Auto Transit v. Brady, a 1977 decision that found states could impose franchise taxes on out-of-state corporations under certain conditions. Brady does not strictly require a physical presence in the state to allow taxation; in fact, it grew out of a trucking business from Michigan that made deliveries in Mississippi. But ever since it was decided in 1992, Quill has been widely seen to create a physical presence requirement for income and franchise taxes as well. Presumably, that is now gone.
How this decision will actually play out remains to be seen. For now, it is clear that states have much more leeway to aggressively impose sales tax collection obligations on nonresident vendors, a power several states are already moving to implement.
Large retailers, both physical and virtual, will adjust to the new tax regime with some inconvenience but without insurmountable problems. Many smaller businesses will likely have to either outsource their online sales fulfillment or face tax problems that can come at them literally from any direction, if they make sales in the 45 states with sales taxes. My guess is that such complexities will increase pressure on Congress to set guidelines under its Commerce Clause power. But until Congress acts to clarify the situation, it will be a free-for-all. Any business that operates across state lines will need to tread carefully.
Will Wayfair ultimately be the beginning end of Roe v. Wade? Maybe not, but it could be seen that way. When conservative justices toss precedent aside to give new tax powers to states over businesses beyond their borders, while liberal jurists side with small businesses against revenue-hungry governments, something else is probably happening below the surface.
Posted by Larry M. Elkin, CPA, CFP®
"Authority of Law" by James Earle Fraser, in front of the Supreme Court Building, Washington, D.C. Photo by Phil Roeder.
When is a historic Supreme Court decision about sales tax not mainly about sales tax? When it’s really about preserving – or overturning – Roe v. Wade, Citizens United, or both.
To understand what just happened at the Supreme Court, we need to think beyond the headlines. Those headlines were simple enough: Last week a 5-4 court majority struck down the central holding of Quill v. North Dakota, a 1992 case that declared a state cannot impose sales tax collection obligations on a business unless that business has a physical presence within the state. The ruling in South Dakota v. Wayfair was a victory for states hoping to force online retailers to collect sales taxes on their behalf.
This is almost certainly not the whole story, nor even the most important story, about the impact of this decision. We can tell from the strange composition of the five-member majority that voted to overturn Quill, and the almost equally curious grouping of four who dissented and would have kept it intact.
Justice Anthony Kennedy wrote the majority opinion. As the typical “swing” vote between the court’s conservatives and liberals, he often gets to write decisions in the most closely contested cases. Sometimes that is the only way to ensure his vote with the majority. But this time, the decisive vote to overturn Quill came not from Kennedy but from Justice Ruth Bader Ginsburg. You can bet something strange is happening any time “the Notorious RBG” is part of a five-justice majority that also includes Kennedy and Ginsburg’s polar opposite, Justice Clarence Thomas, but not her three fellow liberals.
Those three – Justices Sonia Sotomayor, Elena Kagan and Stephen Breyer – joined Chief Justice John Roberts’ dissent. They would have kept Quill intact, even if they believed it should have been decided differently, to honor the judicial principle of “stare decisis.”
Stare decisis asserts that once the courts have settled a precedent, other courts of equal or lesser authority should make every effort to follow that precedent. Wayfair overturns not one, but two previous Supreme Court decisions in the name of fixing perceived missteps in Quill and its predecessor, the 1967 decision National Bellas Hess v. Department of Revenue of Illinois.
Roberts directly stated that he agreed those cases had been wrongly decided; where he differed from the majority was in contending that Congress, not the Court, should correct the problem. “The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago,” Roberts wrote.
If, as Kennedy wrote in the majority opinion, the Court should indeed exercise its power to correct a “mistake” it made 50 years ago and later affirmed, then the “mistake” of Roe v. Wade is in mortal peril. The views of Supreme Court nominees on stare decisis have long been a proxy for willingness to overturn Roe, and it seems unlikely that this was lost on the three liberal justices who joined in Roberts’ dissent.
The marvel is that Ginsburg, a fierce supporter of Roe, did not seem to recognize this danger, although surely a colleague or clerk pointed it out. Or maybe another “mistake” – the way she has characterized the court’s decision in Citizens United – was topmost in her mind instead. Tossing stare decisis to the wind, Ginsburg has called for Citizens United to be overturned almost from the moment the high court decided it, thus allowing corporations and unions to spend money independently to influence election campaigns.
Roberts may have been the only justice whose position in Wayfair did not reflect an agenda involving Roe or Citizens United, or both. My guess is that he was genuinely concerned, as he expressed in his opinion, that the courts are far less suited than Congress to address the problem of how to get millions of businesses to comply with the sales tax requirements of 10,000 different American jurisdictions.
I question whether the liberal justices share that concern at all, but I do believe they are very concerned about keeping the court’s respect for stare decisis at a high enough level to protect Roe. And the court’s conservative justices, with the exceptions of Roberts and possibly Kennedy, may be equally interested in lowering the barrier to reversing the decision that enshrined women’s access to abortion (subject to certain state limits) as a constitutional right. Both Kennedy and Thomas had actually voted with the majority in Quill, only to overrule their own precedent in Wayfair.
None of this is to suggest that last week’s decision is not important in its own right. As I noted in January when the court agreed to take up Wayfair, few individual taxpayers know or care that they are supposed to report and pay “use tax” on online transactions in which they were not charged sales tax. As a result, states lose out on significant tax revenue when residents make online purchases from vendors who don’t collect tax.
South Dakota imposed sales tax collection duties on internet and other out-of-state vendors who have more than $100,000 in annual sales or 200 separate transactions involving consumers within the state. This law was intended to circumvent the prevalent argument that very small or startup businesses would be unduly burdened by an obligation to register with South Dakota and collect its tax. The court majority accepted that position.
The decision in Wayfair may extend beyond the realm of sales tax. Quill and its predecessor, National Bellas Hess, were cases involving sales and use tax, not income or franchise taxes. The principal case controlling franchise tax obligations was Complete Auto Transit v. Brady, a 1977 decision that found states could impose franchise taxes on out-of-state corporations under certain conditions. Brady does not strictly require a physical presence in the state to allow taxation; in fact, it grew out of a trucking business from Michigan that made deliveries in Mississippi. But ever since it was decided in 1992, Quill has been widely seen to create a physical presence requirement for income and franchise taxes as well. Presumably, that is now gone.
How this decision will actually play out remains to be seen. For now, it is clear that states have much more leeway to aggressively impose sales tax collection obligations on nonresident vendors, a power several states are already moving to implement.
Large retailers, both physical and virtual, will adjust to the new tax regime with some inconvenience but without insurmountable problems. Many smaller businesses will likely have to either outsource their online sales fulfillment or face tax problems that can come at them literally from any direction, if they make sales in the 45 states with sales taxes. My guess is that such complexities will increase pressure on Congress to set guidelines under its Commerce Clause power. But until Congress acts to clarify the situation, it will be a free-for-all. Any business that operates across state lines will need to tread carefully.
Will Wayfair ultimately be the beginning end of Roe v. Wade? Maybe not, but it could be seen that way. When conservative justices toss precedent aside to give new tax powers to states over businesses beyond their borders, while liberal jurists side with small businesses against revenue-hungry governments, something else is probably happening below the surface.
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