I often observe that the Supreme Court’s rulings affect all of us. That definitely will be true of its decision allowing state governments to require that internet companies collect sales taxes on transactions.

We now may have to pay more when we buy things online, thanks to the June 21 decision; it is estimated that this might generate as much as $33 billion in additional tax revenue for the states. Also it is right as a matter of basic fairness in treating in-state and out-of-state businesses the same.

Twenty-five years ago, the Supreme Court ruled that a state cannot require businesses to collect sales taxes unless they have a physical presence in the state. The court held that a state doing so would place an undue burden on interstate commerce and thus would be unconstitutional.

Concerned about the erosion of its sales tax base and corresponding loss of critical funding for state and local services, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the State.” The act covers only sellers that, on an annual basis, deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state.

Based on this law, South Dakota sued out-of-state online retailers that met this requirement, but did not collect sales taxes. The Supreme Court, in a 5-4 decision, upheld the South Dakota law and overturned its earlier decision.

There was an unusual split among the justices as Justice Anthony Kennedy wrote the opinion, joined by conservative justices Clarence Thomas, Samuel Alito, and Neil Gorsuch, and liberal justice Ruth Bader Ginsburg.

Justice Kennedy explained that the reality of internet and mail sales makes the requirement for physical presence ever less meaningful. It also results in significant lost revenue for the states.

The court said that it is essentially a judicially created tax shelter for businesses that limit their physical presence in a state, but sell their goods and services to the state’s consumers. The court explained that in 1992, it was estimated that the states were losing between $694 million and $3 billion per year in sales tax revenues as a result of the physical presence rule. Now estimates of lost revenue range from $8 to $33 billion. The court explained that the physical presence rule is an extraordinary imposition by the judiciary on states’ authority to collect taxes and perform critical public functions.

I agree with the court’s decision. Requiring that companies within a state collect sales taxes, but not requiring this of out-of-state companies gives the latter a significant economic advantage. It also costs the states significant much needed revenue.

Yet, the court’s decision is going to create administrative problems and lead to more litigation. As the court noted, there are more than 10,000 state, city and local sales-tax jurisdictions in the United States. A seller will need to figure out how much sales tax to collect on each transaction and where to send that money.

Also, the court did not say that a state could require every business to collect these taxes. Rather, Justice Kennedy’s opinion said that a state could impose a tax only if the business had a “substantial nexus” -- a substantial connection -- to the state.

But what does this mean? The court said that the South Dakota law met this requirement by taxing only businesses that deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state. Beyond this, though, the court has left open the question of what is enough for a substantial nexus and undoubtedly there will be a great deal of litigation on that question.

One of the Supreme Court’s tasks is to adapt the Constitution, a document written in 1787, to the technology and needs of the early 21st century. The court did that last month in its decision about internet sales and in concluding that police need to get a warrant before obtaining records from a cell phone company that reveal a person’s location when he or she was using a cell phone.

Both of these are important decisions in dealing with modern technology. In both, the court got it right.

Almost all of us sometimes make purchases online. Almost all of us have cell phones. Virtually all of us will be touched by these Supreme Court decisions.


Erwin Chemerinsky
Erwin Chemerinsky is dean and professor of law at the UC Berkeley School of Law. He wrote this for the Sacramento Bee. -- Ed.

(Tribune Content Agency)