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Constitutional Connections: Sales taxes, local businesses and the Constitution

Monitor columnist
Published: 8/26/2018 12:20:08 AM

This past June, in South Dakota v. Wayfair, the Supreme Court held that states may require wholly out-of-state businesses to collect and remit sales taxes on in-state purchases of goods and services. Local reaction has been very negative; New Hampshire has no sales tax but plenty of businesses that sell to customers in states that do. The decision thus raises the prospect of money flowing out of New Hampshire without a corresponding inflow to state coffers.

Understandably, Governor Chris Sununu and a bipartisan group of New Hampshire legislators have expressed strong interest in enacting measures to protect local businesses from the one-sided effects of the decision. But the reality is that the same constitutional principle that once shielded these businesses from having to participate in out-of-state sales tax collection efforts now serves to complicate any such legislative response. Let’s examine why through a deeper dive into the Wayfair decision.

South Dakota, like all but a handful of states, has a sales tax that sellers ordinarily must collect and remit to its department of revenue. If for some reason a seller does not remit the tax, state law makes the purchaser liable to pay a use tax at the same rate. But few consumers actually pay use taxes when sellers do not collect sales taxes.

In 1967, in National Bellas Hess v. Illinois, the Supreme Court held that two separate provisions of the Constitution – the 14th Amendment’s due process clause and Article One’s interstate commerce clause – prohibit states from requiring sellers without a physical presence in the state to collect and remit sales taxes on in-state sales.

In 1992, in Quill v. North Dakota, the Supreme Court pulled back from National Bella Hess’s due-process ruling and partially overruled the decision. Quill held that it was not fundamentally unfair for states to impose regulatory requirements on businesses that benefit from transacting business within a state – through catalogue sales, for example – even though they have no office or other physical presence within the state. But at the same time, the Quill court reaffirmed National Bella Hess’s ruling that laws requiring out-of-state businesses to collect and remit sales taxes violate the interstate commerce clause.

With the explosive growth of e-commerce over the past couple of decades, business transactions between consumers and wholly out-of-state sellers have become far more common. Yet the prohibition established in National Bellas Hess and Quill has made it nearly impossible for states to collect sales taxes on such transactions. Evidence suggests that, as a consequence, states have lost up to $34 billion annually. And brick-and-mortar retailers have long complained that the ability of online merchants to do business tax free have put them at an unfair competitive disadvantage.

The Wayfair decision arose from an effort by the South Dakota legislature to prompt the Supreme Court to revisit its precedents. South Dakota enacted a law requiring merchants who annually deliver more than $100,000 of goods or services into the state, or who annually engage in 200 or more separate transactions within the state, to collect and remit a sales tax regardless of whether they have a physical presence within the state.

Online retailers Wayfair Inc., Overstock.com and Newegg Inc., became obligated under the new law to collect and remit South Dakota sales taxes despite not having a physical presence in the state. They challenged the law as a violation of the interstate commerce clause and prevailed in the lower courts, which were required to enforce the principle established in National Bellas Hess and Quill. But in Wayfair, the Supreme Court overruled these cases and held that states may obligate out-of-state businesses to collect and remit sales taxes without violating the interstate commerce clause.

Now, you may be wondering what on earth the interstate commerce clause has to do with the constitutionality of state sales tax regulations. That is a very good question. The clause confers upon Congress the “Power . . . to regulate Commerce . . . among the several States.” Its text places no limits on state regulatory powers. So why did National Bellas Hess and Quill conclude that state efforts to require out-of-state businesses to collect sales taxes violated the clause?

The answer is that the Supreme Court has long inferred from the interstate commerce clause’s explicit grant of power to Congress an implicit withdrawal of power from the states to discriminate against other states with respect to interstate commerce or otherwise to unduly burden interstate commerce. This is the complicated “dormant” commerce clause doctrine that causes Constitutional Law students to pull their hair out.

In National Bellas Hess and Quill, the court concluded that it would unduly burden interstate commerce if states were able to require out-of-state businesses to collect and remit state sales taxes. But in Wayfair, the court abandoned this view. Consequently, as noted above, New Hampshire businesses that sell to customers in states with sales taxes now face the prospect of having to collect and remit those taxes.

Last month, at the urging of Gov. Sununu and a bipartisan group of legislators, a special legislative session was convened to consider a bill to protect New Hampshire businesses from the effects of the Wayfair decision. The bill would have required taxing authorities in other states to register with the New Hampshire Attorney General’s Office, pay a fee, and establish the constitutionality of their sales tax collection schemes to the satisfaction of the Attorney General’s Office in order to collect sales taxes from New Hampshire businesses. The Senate unanimously passed the measure, but the House did not. Instead, to the dismay of the governor and many state senators, it voted to study the measure further.

If protective measures of the sort considered in the special legislative session eventually become law, that is unlikely to be the end of the matter. For the very same dormant commerce clause doctrine that once served as a shield to protect New Hampshire businesses almost surely would be invoked as a sword by taxing states. Their argument would be that legislative measures that interfere with (now) lawful requirements that out-of-state sellers collect and remit sales taxes impose an undue burden on interstate commerce.

Would such an argument succeed in some future battle between states? It is impossible to say for certain. But it is fair to say that the obligation to refrain from placing an undue burden on interstate commerce stands as a serious obstacle to protecting local businesses from the effects of Wayfair.

(John Greabe teaches constitutional law and related subjects at the University of New Hampshire School of Law. He also serves on the board of trustees of the New Hampshire Institute for Civics Education.)




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