South Dakota v Wayfair – A Dormant Commerce Clause Case Will Likely Hit Intenet Etsy and Ebay Sellers with State Sales Tax

Constitutional Law

If you sell enough on Etsy and eBay, you may find yourself having to report sales tax in your buyers’ states.

A recent opinion from the U.S. Supreme Court, South Dakota v. Wayfair, Inc. et al., is likely going to lead to new hassles for internet merchants, including possibly individual sellers on sites like Etsy and eBay.

It also means that consumers will see and feel state taxes more regularly in their online purchases.

My colleague, David Kall, calls this “the biggest sales tax case in 25 years.”  See his reasoned analysis over at McDonaldHopkins.com (here).

The Wayfair opinion may be confusing to people who have not gone to law school even though the bottom line is fairly easy to understand (you’re going to pay sales tax on internet goods).  The average person who was wise enough to avoid law school likely blithely glides through life unaware of a leviathan known as the Commerce Clause.  According to the Constitution, Congress gets to regulate commerce among the states.  Simple.  Except… well, the courts are usually the ones formulating the rules, not Congress.  But the courts are in a different branch of government.  So we’re not exactly doing what the Constitution says.  Stranger still, even though the Constitution says that Congress (alone) regulates commerce among the states, the courts, in their abdicated role, have decided that the states can regulate interstate commerce to some extent.  So now we have the courts and the states doing what the Constitution said was the province of Congress.  I’ll save you 200 years of jurisprudence and a semester of constitutional law… that’s just the tip of the iceberg of confusion on this Commerce Clause thing you likely have never heard of.

In three cases over the last several decades, the U.S. Supreme Court has heard the question of whether a state can require a non-resident seller simply for sending goods or services into the state.  Last time, the concern was that mail order companies were avoiding taxes by not being physically in the state.  But that was 25 years or so ago.  Now, it’s the internet.  And this time, things are different.

The old rule was the “physical presence rule.”  Meaning sellers which did not have a physical presence in a state did not have to collect and remit sales tax on items they sell in a foreign state.  That rule is now gone — upon the urging of 41 states, likely including yours, which want the tax revenue.

The Court, in a 5-4 ruling, says that the “old rule” was wrong when that opinion was written (even though that case essentially re-affirmed a prior case and has been the law of the land for decades).  But, aside from being wrong then, it is wrong now because of the “Internet Revolution” and the “Cyber Age” (two expressions which I thought had gone out with concerns about Y2K).  The Court noted “it is an inescapable fact of modern commercial life that a substantial amount of business is transacted with no need for a physical presence within a State in which business is conducted.”  Even so, the Court hedged it bets by noting that out-of-state companies are often “in” the state by leaving cookies on end users’ hard drives, having apps downloaded, being instantly available online in the state, and by conducting targeted advertising in the State.  The Court was concerned that the old rule was a judicially created tax haven which did not need to exist and which was adversely impacting the market and the states’ ability to generate revenue.

The dissent held onto the notion that the “old rule” should not be tossed out on the premise of stare decisis and the fact that such a significant shift in taxation, which is going to drastically affect the large internet market, should be a decision, as the Constitution indicated, best left to Congress.  But, as the majority pointed out, Congress has handed that role over to the courts and, with the Wayfair opinion, we have the results.

Look for Etsy and eBay to advise its sellers of the impact of this decision in the coming weeks.  Likewise, look for your internet purchases to reflect state taxes soon.

UPDATE: eBay has asked its users to sign a petition asking Congress to take action, here.

Image credit: Blue Diamond Gallery

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