San Francisco • Internet businesses can’t hide from state taxes anymore.
The Supreme Court ruled last Thursday that online retailers like Amazon.com Inc must now pay state taxes when US shoppers click the “Buy” button. For decades, e-commerce businesses only had to fork over state taxes to states in which they had a physical presence. If, for example, South Dakota wanted to collect sales taxes anyway, it would have to try to chase down individual buyers to get them to pay their fair share of their Internet tax obligations — a tall task.
Now the rules are changing. And the court’s decision could mean anywhere from US$8 billion (RM32.08 billion) to US$23 billion collectively in new tax revenue for states.
But tax law is boring. What makes The Supreme Court case South Dakota versus Way-fair Inc worth understanding isn’t what it means for state budgets, or online shopping, or even the future of e-commerce start-ups (though that’s important, too). For me, it’s most interesting because of what it says about the evolution of our economy and the state of our constitutional system of government. The ruling is emblematic of the age we live in for a couple reasons.
For one, the decision speaks to how dominant an economic force e-commerce has become. In the majority opinion, Justice Anthony Kennedy writes, “[T]he Internet’s prevalence and power have changed the dynamics of the national economy.” It was a different era when the court ruled in 1967, and again in 1992, that companies without physical presences didn’t have to collect taxes. Justice Clarence Thomas sat on the court back in 1992 when it reaffirmed the tax rule. He wrote that “a quarter century of experience has convinced” him that he was wrong. The five- to-four ruling was close, and effectively reversed a half century of precedent, over-turning an earlier decision where the primary concern was mail orders, not the Internet.
But if there’s one thing that the dissenting Justices agree with the majority on, it’s how important Internet-based retailers have become. “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule,” Chief Justice John Roberts wrote for the minority.
Where Roberts diverged with the majority was over what branch of government should be addressing and policing that seismic economic shift. Just as in the Supreme Court’s recent decision protecting arbitration agreements in labour disputes, Congress has the full authority to step in and override the Supreme Court. In fact, at times the court can sound desperate for Congress to act. It’s in the absence of Congressional action that the Supreme Court seems forced to legislate from the bench.
In this case, Congress has the power to regulate interstate commerce and to decide what should be done about state tax laws. But it hasn’t managed to pass much legislation, despite some failed attempts, which gets to the heart of Roberts’ qualms. Even if the court was wrong to create the physical-presence rule, it should be Congress that comes in to fix it. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be under- taken by Congress,” he writes. The majority disagrees, holding, “It is inconsistent with this court’s proper role to ask Congress to address a false constitutional premise of this court’s own creation.”
It’s striking how important setting the default position is for the court in an era when Congress is gridlocked. But all is not lost to
partisan dysfunction: Perhaps the most anachronous part of the decision is how in this case the justices broke party lines. Conservative Roberts wrote the dissent with three Democrat-appointed justices.
Meanwhile, Kennedy’s majority is sealed with the support of reliable liberal Ruth Bader Ginsburg. In a country with starker-than-ever political dividing lines, there’s one thing that seems to have alliances mixed up: What to do about technology.
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