The South Dakota case
This is the decision which overturned Quill Corp. v. North Dakota (1992), which, in turn, had held that the ‘Dormant Commerce Clause’ barred American States, from compelling retailers, to collect ‘sales’ or ‘use’ taxes, in connection with mail order or Internet sales, made to their residents, unless those retailers had a physical presence, in the taxing state (see discussion of the ‘Dormant Commerce Clause’ below).
Since the decision of Quill, in 1992, the volume of interstate sales via electronic channels, particularly purchases from Internet vendors, has grown rapidly, and the Government Accounting Officehas estimated that in 2017 states had lost over US$13 billionin taxes they could not collect. Following a statement made in a concurrence opinion by Justice Anthony Kennedy in a 2015 related case which suggested that it was time to review the decision of Quillin the wake of modern technology, more than 20 states passed “kill Quill” legislation intending to collect sales tax from out-of-state vendors, purposely to provide the necessary legal vehicle to take to the Supreme Court; South Dakota’s was the first to make it through lower courts to the Supreme Court.
The Court granted a writ of certiorari (to say it would review the lower decision) in January 2018, heard the case on April 17, 2018, and issued its decision on June 21, 2018.
The Court’s 5–4 majority decision overturned Quill, ruling that the physical presence rule, decided from Quill, was “unsound and incorrect”, in the current age of Internet services.
The ‘Dormant Commerce Clause’ – the relevant constraint
The Dormant Commerce Clause, or Negative Commerce Clause, in American constitutional law, is a legal doctrine that courts, in the United States, have inferred from the Commerce Clause, in Article I of the US Constitution. The Dormant Commerce Clause is used to prohibit state legislation that discriminates against interstate or international commerce.
The background to the ‘Commerce Clause’ was the State’s wish to be able to levy ‘duties of tonnage’, without Congressional (Federal) interference, so they could finance the clearing of harbours and light houses.
The form of the ‘Commerce Clause’, that was included in the constitution, was: “No state shall, without the consent of Congress, lay any duty of tonnage … ” (creating a conditional concurrent taxing right).
The reason for the need for Congressional consent, was prohibit state or municipal laws, whose object was local economic protectionism – laws that would excite those jealousies and retaliatory measures, that the Constitution was designed to prevent. This has been interpreted as a Federal power to regulate commerce, but it lies ‘dormant’, as long as the State laws are non-discriminatory (which is to say, nothing that burdens ‘out-of-state’ interests, more than ‘in-state’ interests).
At this point, one can see how the Quill case came to rule that a State sales tax, could not be levied on a sale, from another state, unless they had a physical presence in the taxing state (as then it could not be discriminating against that ‘out-of-state’ vendor).
One can also see how this is no longer required (in the internet era) to avoid the State sales tax being relevantly ‘discriminatory’.
Impact of this US case on taxing digital commerce around the world (including Australia)
There is a related TT Article on the implications of this US case, in dropping the requirement, for a physical presence, before the relevant State can tax sales, into their state.
And there is another TT Article, that canvasses the current world wide approach, being taken to levy taxes in the digital age.