Since the advent of an Internet marketplace, states have been forbidden from collecting sales taxes for online purchases made out-of-state. States, such as Utah, have opted to work around that prohibition by encouraging online consumers to self-report on state tax forms and by creating direct agreements with large online sellers such as Amazon to collect taxes. But, by and large, those methods have been inefficient and unpredictable.
Well, all of that will now change with the Wayfair decision.
The United States Supreme Court just ruled that the old law governing collection of online sales taxes has become unfair and anachronistic. In a 5-4 decision, dominated by conservative justices, the Court corrected years of tax inequities and market distortions overturning its own previous decisions.
The conservative majority decision revolved around two key concepts: First, “State regulations may not discriminate against interstate commerce” and, second, “States may not impose undue burdens on interstate commerce.” Ironically, in two previous decisions, the Court violated its own understanding of the Commerce Clause. The Bellas Hess and Quill decisions had held for over 20 years that sales taxes only could be collected from businesses with a “physical presence” in the state – both creating market discrimination and undue burdens.
Conservatives ought to pay close attention as to why the Court overturned its previous stand: “Quill creates rather than resolves market distortions.” The Court explains, “In effect, [the overturned decision] is a judicially created tax shelter for businesses that limit their physical presence in a State but sell their goods and services to the State’s consumers…It treat[ed] economically identical actors differently for arbitrary reasons. For example, a business that maintains a few items of inventory in a small warehouse in a State is required to collect and remit a tax on all of its sales in the State, while a seller with a pervasive Internet presence cannot be subject to the same tax for the sales of the same items.”
If you believe in free markets, that past precedent was hardly free or a market.
The main argument of opponents to the Court’s new finding centers on the constitutional dictum that only Congress regulates the Commerce Clause and, hence, only Congress can address this issue. But, again, the Court handily deconstructed that argument. It replied, “It is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation. The Internet revolution has made Quill’s original error all the more egregious and harmful. The Quill Court did not have before it the present realities of the interstate marketplace, where the Internet’s prevalence and power have changed the dynamics of the national economy.”
For me, a more interesting aspect of this ruling has been how some conservative groups have shilled for big businesses opposed to changing the interstate sales tax laws. You might recall that Utah’s own Overstock.com has been the biggest defender of not having to process sales taxes. Its former board chairman even ran a gubernatorial campaign against Governor Gary Herbert to try to stop the precedent-setting sales tax deal with online giant Amazon.
While it is inside baseball, many public policy groups and think tanks take corporate donations precisely to work on issues like this case. The charge does get out of hand from progressive groups who think every conservative group’s workload is bought and paid for by corporate America or the Koch Brothers. I always would respond, “I wish!” But there is some truth to it – on both sides of the spectrum.
Corporations are transactional by nature and if a corporation is giving to some cause, you can bet your bottom dollar it is getting something from it –either directly, such as in this case, or indirectly through better public relations.
My point is that there are times when special interests drive policy. And, while I have not, and will not, take the time to verify my suspicions, the Wayfair sales tax case is probably one of them. If not, outside of pure ideology, I cannot explain why advocates of free markets would support a policy that so obviously distorts the marketplace. The Court did the right thing.