Connecting state and local government leaders
When it comes to collecting sales tax on remote sellers, South Dakota has picked the wrong law to challenge.
WASHINGTON — Just because South Dakota’s state government continues to dig a deeper entrenched position to require out-of-state sellers to collect state sales tax doesn’t make the practice legal. The state’s decision to begin prosecuting remote sellers, coupled with the passage of Senate Bill 106, reveals a blatant disregard for Constitutional law. And in their recent legal filing, the state basically admitted such.
South Dakota is employing a truly unique strategy using unconstitutional legislation and lawsuits at the state level to drive companies to seek a national solution. Under the South Dakota law, remote sellers with as few as 200 transactions into the state (regardless of revenue size) must collect state sales tax. State legislators across the country are wetting their lips and hoping that the small businesses of America back down and do what the states want. But, when you have U.S. Supreme Court precedent on your side, there is no reason to back down.
In a 1992 judgement—Quill Corp. v. North Dakota—all nine justices agreed that the U.S. Constitution requires a business to have a “substantial nexus” with a state before a state can require that business to collect the state’s sales taxes. Justices—both liberal and conservative— unanimously agreed that states can only force businesses with physical presence to collect state tax.
Despite the yearning of pro-tax legislators, last year’s concurrence opinion from Justice Anthony Kennedy actually provides little support for South Dakota and other states who may hope to reverse the 1992 decision.
First, Kennedy's concurrence relies on an incorrect application of the Complete Auto Transit, Inc. v. Brady case as the standard for a state taxing under Commerce Clause. That Complete Auto test requires assessing multiple factors, and the Supreme Court has never determined constitutionality of a state's use tax on an out-of-state seller solely based on its business sales within the state.
Kennedy also mischaracterizes what constitutes "extensive business" in an effort to justify a "substantial nexus" for out-of-state sellers. Kennedy cites only two cases in support of tearing down the physical presence standard—Complete Auto Transit and Holmes. But in both cases, the Court explained that "substantial nexus" required the company had a physical presence in the state. Holmes (finding a "substantial nexus" because that the company had a 13 stores in the state); Complete Auto Transit, Inc. (finding a "substantial nexus" because the company had a physical presence in the state by having an office and a storage yard large enough to hold 350 cars).
Finally, Justice Kennedy misstates the rule for overturning Supreme Court precedent. He put the burden on those who support Quill to show their position is still relevant. But much like a criminal court, the defendant is innocent until proven guilty. Supreme Court precedent is also viable until it is legitimately challenged. The rationale for Supreme Court precedent is perpetually viable until changed—per centuries of American jurisprudence.
Unfortunately, one case Kennedy did not cite, was his own concurrence in Quill where he voted to uphold the physical presence standard. In his Quill concurrence, Justice Kennedy recognized the consequences of reversing Supreme Court precedent saying it is even stronger where it has, as “the Bellas Hess rule [does] . . . engendered substantial reliance and has become part of the basic framework of a sizable industry.”
Kennedy also said “we ought not visit economic hardship upon those who took us at our word.” And we could not agree more with Justice Kennedy on that point. Breaking Constitutional law and overturning Supreme Court precedent in order to inflict pain on small businesses does not seem to be what our forefathers envisioned as the role of state governments.
From both a legal and practical standpoint, we believe it remains clear that South Dakota has picked the wrong law to challenge.
Carl Szabo is senior policy counsel for NetChoice, a trade association of e-commerce businesses and online consumers, and is based in Washington, D.C.