When the Supreme Court soon decides South Dakota v. Wayfair, it will send a strong signal to all American consumers and taxpayers, especially small businesses. If South Dakota wins, all of us may confront tax demands from states and localities we've never visited and have nothing to do with. That's because South Dakota wants to erase the court's long-standing 'nexus' standard for demanding tax collections from out-of-state sellers.
Simply put, South Dakota wants to collect tax on all transactions with its residents, whether or not they involve out-of-state purchases. South Dakota says online sellers like Wayfair.com both deprive the state of "needed" revenues and get an unfair advantage over local sellers.
But even that general premise should not be accepted as obvious. The court's 'nexus' standard (from the 1992 Quill case) protects a vital feature of our federal system – it keeps the national economy free of state-imposed burdens and it heads off interstate conflicts. The Constitution has a Commerce Clause, as Robert Bork put it, to "carve stability...out of commercial anarchy." In fact, that anarchy, under the Articles of Confederation, is what prompted the drafting of our Constitution in the first place.
When you come down to it, South Dakota wants a regime of unconstrained multiplication of taxes on economic activity, with no real limits and endless potential for conflict. If you mess with the constitutional structure this way, you had best have very good reasons to do so. Does South Dakota have good reasons?
The answer is no. As South Dakota acknowledges, it drafted a statute to tax out-of-state sales in order to test how far it could go while keeping enough of semblance of a nexus to get the court to change its precedent. As Justice Samuel Alito noted during oral argument on this case, the national rules that South Dakota seeks are for legislators to design, not for judges to impose via “test cases.” South Dakota needs a compelling reason to resort to the courts because it has been frustrated in Congress. Its supposedly compelling reason in this case is, "We are losing money we really need because of all these sales we can't collect taxes on."
But is even that much true? All parties to this case agree there is some revenue foregone ("lost") since South Dakota can't collect tax on all cross-border transactions involving its residents. But no one agrees how much revenue is being lost, and the GAO has found that the states' estimated revenue “loss” from out-of-state sales has been inflated as much as four-fold. Indeed South Dakota's loss may be only a fraction of 1 percent of its estimate.
Further, as Chief Justice John Roberts noted, there is substantial evidence that revenue loss from internet commerce is minimal, simply because the market (surprise!) is self-correcting; e-commerce and local sales outlets are converging in many ways, and large national internet sellers increasingly have physical presence (“nexus”) in most states.
So it's not clear there is even a problem to be solved here. The Supreme Court argument presumed there was one, leaving the choice between the court unleashing the states to roam freely in national commerce, or getting Congress to enact a law solve the problem (one hopes with suitable constraints).
However this case comes out, it's a shame the economic arguments were so narrowly drawn. Are states losing sales tax revenue to e-commerce, or aren't they? The larger impact of e-commerce on the national and South Dakota economies is never put in focus.
The Pew Charitable Trusts, by contrast, looked at all trends in state revenue, and found those revenues overall grew 10 percent over the ten years ending in 2017, while South Dakota’s grew 18.6 percent over that period. So the South Dakota economy seems to be in great shape. How much of its growth might have been catalyzed by tech innovations like e-commerce?
This shows the futility of trying to analyze bits of tax law in isolation. That approach would have doomed the 2017 federal tax cut, for instance. We have a national economy, and neither parochial interests nor crass politics (South Dakota Attorney General Mark Jackley is running for governor, hyping his Supreme Court appearance) should be allowed to pour sand into the gears.
George Pieler is a lawyer in Washington, DC, and a contributor to the Institute for Policy Innovation.