Supreme Court provides mechanism for states to collect sales tax from online retailers

June 22, 2018 - Posted by: admin - In category:

taxes - No Responses

This court decision will be applauded by local businesses and likely mourned by many online retailers.  Either way, it represents the Supreme Court overstepping its bounds.  The Court is supposed to interpret and uphold the Constitution and statutory laws, not make their own laws based on “economic reality.”

Do I support local businesses? You bet.  Do I believe that a local bookstore or bike shop should be on an “even playing field” with internet giants like Amazon.com and others? Yes, at least insofar as such leveling requires online vendors to charge sales tax.  Before this court decision, many online vendors had the advantage of not being required to charge sales tax, where the local store has always been required to do so.  So again, this judicial action will be applauded by all of the “buy local” folks.

Several online articles have reviewed this monumental Supreme Court decision, including one from ABCNews.go.com, from which we get the following quotes:

States will be able to force more people to pay sales tax when they make online purchases under a Supreme Court decision Thursday that will leave shoppers with lighter wallets but is a big financial win for states.

The Supreme Court’s 5-4 opinion Thursday overruled a pair of decades-old decisions that states said cost them billions of dollars in lost revenue annually. The decisions made it more difficult for states to collect sales tax on certain online purchases, and more than 40 states had asked the high court for action. Five states don’t charge sales tax.

“Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the States,” [Justice Kennedy] wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito and Neil Gorsuch. Kennedy wrote that the rule “limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”

https://abcnews.go.com/Technology/wireStory/supreme-court-rules-states-online-sales-tax-case-56057252

Here’s the problem: there is nothing in the Constitution and there is no Congressional act that gives the State of Utah the right to exercise taxing authority over a vendor in the state of Texas if that vendor has no presence in Texas.  Does the fact that a vendor has a website that can be accessed in Utah count as physical presence?  NO!!  If that were true, then every person and company with a website would be subject to the jurisdiction of every governmental entity in the entire world–since “www” stands for “world wide web.”

It is easy to understand that the Idaho legislature cannot pass a law saying that folks walking down a street in New York are prohibited from wearing jeans (and have the Idaho folks believe that there is any validity whatsoever to that law). Why is it different when it comes to the Idaho legislature passing a tax law that purports to be binding on a vendor in New York, New Hampshire or Alaska?  Why is that conceptually, legally or rationally different?  It isn’t.  Even so, Justice Kennedy, on behalf of the majority of the Court, states that the “economic reality” which results “in significant revenue losses to the States” somehow justifies a different result when we are talking about state taxing authority.  Let me get this straight: something that is not permissible, lawful or Constitutional otherwise (i.e. a State exercising authority outside of its borders) becomes permissible if lots of money is at stake?  Sorry, that’s not how it is supposed to work, and such result-oriented court opinions (rather than applying the laws as currently drafted) are inappropriate and, frankly, dangerous.

From the actual court opinion, Article II of the majority, we find the following statement:

The Constitution grants Congress the power “[t]o regulate Commerce . . . among the several States.” Art. I, §8,
cl. 3. The Commerce Clause “reflect[s] a central concern of
the Framers that was an immediate reason for calling the
Constitutional Convention… Although the Commerce
Clause is written as an affirmative grant of authority
to Congress, this Court has long held that in some
instances it imposes limitations on the States absent
congressional action.

Justice Kennedy should have just stopped there, as that is the Constitutional basis for why the Court erred in taking the action it took today.  Justice Roberts, in his dissent, had it right:

The Constitution gives Congress the power “[t]o regulate Commerce . . . among the several States.” Art. I, §8. I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.

By the way, Justice Kennedy also spends a lot of time and energy talking about how ideally, states would tax their own consumer-citizens who make online purchases.  For example, Arizona has clear jurisdiction and taxing authority over Arizona residents, so it can pass laws requiring Arizona residents to pay sales tax on their online purchases.  No problem, right? Well, the problem cited by Justice Kennedy is that states are having a really difficult time getting their citizens to report such online purchases.  So, the only other option is to go after the online vendors.  Really?  Why is that the better option?  Why not, instead, figure out how to enforce the tax laws written and cause citizens of applicable states to comply with the same?  Why is it easier and more correct to pass the burden of enforcement onto out-of-state vendors?  Further, we all know that about 90%  of our various tax systems (state and federal) rely on “the honor system”–at least when it comes to sales and self-employment.  So, why should citizens purchasing goods online get a free pass and not be required to honestly report and pay taxes on such purchases?  Afterall, such citizens are expected to be honest in all other aspects of their tax filings?

In summary, I believe today’s SCOTUS decision is incorrect–not because I am a shareholder in Amazon (I’m not, by the way), not because I have it out for the local brick and mortar store owner (I don’t), but because this is not the job of the U.S. Supreme Court.  Making laws is the job of Congress, not the Court.  The judiciary is tasked with interpretation of the Constitution and Congressional actions.  The opinion today didn’t even pretend to do that–it was just a few justices deciding that “economic realities” mandated a dramatic shift in the world of online sales taxes.