The answer, issued in the ruling held in a 5-4 decision on Thursday, is a bad one for taxpayers.
Many proponents of an online sales tax have argued that we must completely revisit what we know about interstate commerce, and create illusory tax regimes to contemplate a brave new order of online transactions.
In reality, none of this is true. For one, while it has been 26 years since the Supreme Court visited the issue in Quill Corp v. North Dakota, the principles outlined in that decision translate easily to today’s retail environment. In that decision, the Supreme Court declared that a business must have a physical presence inside a state in order to be exposed to that state’s tax authority. This "physical presence" doctrine requires no further clarification when applied to today’s online era.
It did, however, prevent states from taxing outside their own geographic boundaries. And for good reason — politicians should not be granted the power to tax citizens who cannot hold them accountable for that leaching.
South Dakota, chafing at these restraints, attempted to flout the Constitution’s obvious deference to Congress on matters of interstate commerce and crafted a law in 2016 that required all businesses with effectively any business nexus with South Dakota to pay taxes to the state. As the National Taxpayers Union stated in its amicus brief to the court: “This obligation apparently attaches regardless of the location or domicile, domestic or foreign, of the seller and even of the purchaser. An Illinois resident may purchase a product in New York for delivery to South Dakota that would trigger this monitoring requirement.”
Nevertheless, the Supreme Court affirmed South Dakota’s power to do so today, ruling the physical presence standard applied by Quill was “unsound and incorrect.”
So, what now? In short: Who knows? For one, there is the matter of administration: This effectively opens the floodgates of states asserting tax authority over businesses and individuals all across the country, regardless of where they’re actually located. Imagine complying with the different rules, rates, and definitions of more than 12,000 taxing jurisdictions nationwide — online retailers’ stocks dropped precipitously immediately following the announcement, but this will create a stifling effect on the robust world of online commerce that serves to connect small businesses across the country and, indeed, across the world.
Admittedly, the world has become more complex since Quill. But the answer is not to empower more bureaucrats and erect more tax systems – it is to distill and clarify existing laws and restrain the ability of revenue-hungry lawmakers from taxing citizens to whom they have no accountability.
Much ink has been spilled bemoaning the Internet’s so-called cannibalization of brick-and-mortars, a characterization that gets the true impact of 21st century evolution in commerce completely backward.
Nowhere have big businesses been less insulated than through the spread of the Internet. The democratizing force of online connectivity has allowed small businesses to compete with incumbents in a way the pre-Internet era never could have envisioned. Not only are the faculties of small business expanded manifold by their widespread access to the web, but in many cases they are also not competing with massive online retailers; they are vendors for them.
It is true that as society progresses and technologies evolve, businesses bear the burden of modernization, which can entail additional capital costs and alterations to business practices. No generation has been immune from the question of how employers and workforces respond to changes in the ecosystems in which they operate.
However, I would ask what augurs a more onerous burden for business: the advent of new consumer demands (in this case, the conveniences of online commerce outstripping brick and mortar motilities) or short-sighted changes to public policy that remove one of the last barriers (geography) protecting Americans from overzealous state and local taxing authorities?
The answer seems obvious. Except to the Supreme Court.