The Taxing and Spending Clause

Restriction of State Revenue Power

Michelin Tire Corp v. Wages (1976)

423 U.S. 276 (1976)

Vote: 8-0
Majority: Brennan, joined by Burger, Stewart, Marshall, Blackmun, Powell, and Rehnquist
Concur: White
Not participating: Stevens

MR. JUSTICE BRENNAN delivered the opinion of the Court.

Respondents, the Tax Commissioner and Tax Assessors of Gwinnett County, Ga. assessed ad valorem property taxes against tires and tubes imported by petitioner from France and Nova Scotia that were included on the assessment dates in an inventory maintained at its wholesale distribution warehouse in the county. Petitioner brought this action for declaratory and injunctive relief in the Superior Court of Gwinnett County, alleging that, with the exception of certain passenger tubes that had been removed from the original shipping cartons, the ad valorem property taxes assessed against its inventory of imported tires and tubes were prohibited by Art. I, § 10, cl. 2, of the Constitution, which provides in pertinent part:

“No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws. … ”

Petitioner, a New York corporation qualified to do business in Georgia, operates as an importer and wholesale distributor in the United States of automobile and truck tires and tubes manufactured in France and Nova Scotia by Michelin Tires, Ltd …

The imported tires, each of which has its own serial number, are packed in bulk into the trailers and vans, without otherwise being packaged or bundled. They lose their identity as a unit, however, when unloaded from the trailers and vans at the distribution warehouse. When unloaded, they are sorted by size and style, without segregation by place of manufacture, stacked on wooden pallets each bearing four stacks of five tires of the same size and style, and stored in pallet stacks of three pallets each. This is the only processing required or performed to ready the tires for sale and delivery to the franchised dealers …

Both Georgia courts addressed the question whether, without regard to whether the imported tires had lost their character as imports, Georgia’s nondiscriminatory ad valorem tax fell within the constitutional prohibition against the laying by States of “any Imposts or Duties on Imports. … ” The Superior Court expressed strong doubts that the ad valorem tax fell within the prohibition, but concluded that it was bound by this Court’s decisions to the contrary …

Our independent study persuades us that a nondiscriminatory ad valorem property tax is not the type of state exaction which the Framers of the Constitution … had in mind as being an “impost” or “duty … ”

The Framers of the Constitution … sought to alleviate three main concerns by committing sole power to lay imposts and duties on imports in the Federal Government, with no concurrent state power: the Federal Government must speak with one voice when regulating commercial relations with foreign governments, and tariffs, which might affect foreign relations, could not be implemented by the States consistently with that exclusive power; import revenues were to be the major source of revenue of the Federal Government, and should not be diverted to the States; and harmony among the States might be disturbed unless seaboard States, with their crucial ports of entry, were prohibited from levying taxes on citizens of other States by taxing goods merely flowing through their ports to the other States not situated as favorably geographically …

It is obvious that such nondiscriminatory property taxation can have no impact whatsoever on the Federal Government’s exclusive regulation of foreign commerce, probably the most important purpose of the Clause’s prohibition. By definition, such a tax does not fall on imports as such because of their place of origin. It cannot be used to create special protective tariffs or particular preferences for certain domestic goods, and it cannot be applied selectively to encourage or discourage any importation in a manner inconsistent with federal regulation …

Finally, nondiscriminatory ad valorem property taxes do not interfere with the free flow of imported goods among the States … Indeed, importers of goods destined for inland States can easily avoid even those taxes in today’s world. Modern transportation methods such as air freight and containerized packaging, and the development of railroads and the Nation’s internal waterways, enable importation directly into the inland States. Petitioner, for example, operates other distribution centers from wholesale warehouses in inland States. Actually, a quarter of the tires distributed from petitioner’s Georgia warehouse are imported interstate directly from Canada. To be sure, allowance of nondiscriminatory ad valorem property taxation may increase the cost of goods purchased by “inland” consumers. But, as already noted, such taxation is the quid pro quo for benefits actually conferred by the taxing State. There is no reason why local taxpayers should subsidize the service used by the importer; ultimate consumers should pay for such services as police and fire protection accorded the goods just as much as they should pay transportation costs associated with those goods …

Petitioner’s tires in this case were no longer in transit. They were stored in a distribution warehouse from which petitioner conducted a wholesale operation, taking orders from franchised dealers and filling them from a constantly replenished inventory. The warehouse was operated no differently than would be a distribution warehouse utilized by a wholesaler dealing solely in domestic goods, and we therefore hold that the nondiscriminatory property tax levied on petitioner’s inventory of imported tires was not interdicted by the Import-Export Clause of the Constitution. The judgment of the Supreme Court of Georgia is accordingly

Affirmed.

MR. JUSTICE STEVENS took no part in the consideration or decision of this case.


Complete Auto Transit v. Brady (1977)

430 U.S. 274 (1977)

Decision: Affirmed
Vote: 9-0
Majority: Blackmun, joined by Burger, Brennan, Stewart, White, Marshall, Powell, Rehnquist, and Stevens

MR. JUSTICE BLACKMUN delivered the opinion of the Court.

… The issue in this case is whether Mississippi runs afoul of the Commerce Clause, U.S. Const., Art. I, § 8, cl. 3, when it applies the tax it imposes on “the privilege of … doing business” within the State to appellant’s activity in interstate commerce …

The taxes in question are sales taxes assessed by the Mississippi State Tax Commission against the appellant, Complete Auto Transit, Inc … The assessments were made pursuant to the following Mississippi statutes …

“Upon every person operating … any … transportation business for the transportation of persons or property for compensation or hire between points within this State, there is hereby levied, assessed, and shall be collected, a tax equal to five per cent of the gross income of such business … ”

Any person liable for the tax is required to add it to the gross sales price and, “insofar as practicable,” to collect it at the time the sales price is collected.

Appellant is a Michigan corporation engaged in the business of transporting motor vehicles by motor carrier for General Motors Corporation. General Motors assembles outside Mississippi vehicles that are destined for dealers within the State. The vehicles are then shipped by rail to Jackson, Miss., where, usually within 48 hours, they are loaded onto appellant’s trucks and transported by appellant to the Mississippi dealers …

[T]he Mississippi Tax Commission informed appellant that it was being assessed taxes and interest totaling $122,160.59 for the sales of transportation services during the three-year period from August 1, 1968, through July 31, 1971. Remittance within 10 days was requested … Appellant paid the assessments under protest and, in April, 1973, pursuant to § 10121.1 … instituted the present refund action …

Appellant claimed that its transportation was but one part of an interstate movement, and that the taxes assessed and paid were unconstitutional as applied to operations in interstate commerce …

Appellant’s attack is based solely on decisions of this Court holding that a tax on the “privilege” of engaging in an activity in the State may not be applied to an activity that is part of interstate commerce. Spector v. O’Connor, (1951) … This rule looks only to the fact that the incidence of the tax is the “privilege of doing business”; it deems irrelevant any consideration of the practical effect of the tax. The rule reflects an underlying philosophy that interstate commerce should enjoy a sort of “free trade” immunity from state taxation …

Over the years, the Court has applied this practical analysis in approving many types of tax that avoided running afoul of the prohibition against taxing the “privilege of doing business,” but, in each instance, it has refused to overrule the prohibition. Under the present state of the law, the Spector rule, as it has come to be known, has no relationship to economic realities …

In this case, of course, we are confronted with a situation like that presented in Spector. The tax is labeled a privilege tax “for the privilege of … doing business” in Mississippi … and the activity taxed is, or has been assumed to be, interstate commerce. We note again that no claim is made that the activity is not sufficiently connected to the State to justify a tax, or that the tax is not fairly related to benefits provided the taxpayer, or that the tax discriminates against interstate commerce, or that the tax is not fairly apportioned. The view of the Commerce Clause that gave rise to the rule of Spector perhaps was not without some substance. Nonetheless, the possibility of defending it in the abstract does not alter the fact that the Court has rejected the proposition that interstate commerce is immune from state taxation …

Not only has the philosophy underlying the rule been rejected, but the rule itself has been stripped of any practical significance. If Mississippi had called its tax one on “net income” or on the “going concern value” of appellant’s business, the Spector rule could not invalidate it. There is no economic consequence that follows necessarily from the use of the particular words, “privilege of doing business,” and a focus on that formalism merely obscures the question whether the tax produces a forbidden effect. Simply put, the Spector rule does not address the problems with which the Commerce Clause is concerned. Accordingly, we now reject the rule of Spector Motor Service, Inc. v. O’Connor that a state tax on the “privilege of doing business” is per se unconstitutional when it is applied to interstate commerce, and that case is overruled.

There being no objection to Mississippi’s tax on appellant except that it was imposed on nothing other than the “privilege of doing business” that is interstate, the judgment of the Supreme Court of Mississippi is affirmed.

It is so ordered.


Oregon Waste Systems v. Dept of Environmental Quality of Oregon (1994)

511 U.S. 93 (1994)

Decision: Reversed and remanded
Vote: 7-2
Majority: Thomas, joined by Stevens, O’Connor, Scalia, Kennedy, Souter, and Ginsburg
Dissent: Rehnquist, joined by Blackmun

Justice Thomas delivered the opinion of the Court …

Today, we must decide whether Oregon’s purportedly cost-based surcharge on the in-state disposal of solid waste generated in other States violates the Commerce Clause.

Like other States, Oregon comprehensively regulates the disposal of solid wastes within its borders. Respondent … oversees the State’s regulatory scheme by developing and executing plans for the management, reduction, and recycling of solid wastes. To fund these and related activities, Oregon levies a wide range of fees on landfill operators. In 1989, the Oregon Legislature imposed an additional fee, called a “surcharge,” on “every person who disposes of solid waste generated out-of-state in a disposal site or regional disposal site … ” At the conclusion of the rulemaking process, the Commission set the surcharge on out-of-state waste at $2.25 per ton. In conjunction with the out-of-state surcharge, the legislature imposed a fee on the in-state disposal of waste generated within Oregon. The in-state fee, capped by statute at $0.85 per ton (originally $0.50 per ton), is considerably lower than the fee imposed on waste from other States … Subsequently, the legislature conditionally extended the $0.85 per ton fee to out-of-state waste, in addition to the $2.25 per ton surcharge, § 459A.110(6), with the proviso that if the surcharge survived judicial challenge, the $0.85 per ton fee would again be limited to in-state waste …

Petitioners challenged the administrative rule establishing the out-of-state surcharge and its enabling statutes under both state law and the Commerce Clause of the United States Constitution …

We granted certiorari … because the decision below conflicted with a recent decision of the United States Court of Appeals for the Seventh Circuit …

The Commerce Clause provides that “[t]he Congress shall have Power … [t]o regulate Commerce … among the several States.” Art. I, § 8, cl. 3. Though phrased as a grant of regulatory power to Congress, the Clause has long been understood to have a “negative” aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce …

[W]e have held that the first step in analyzing any law subject to judicial scrutiny under the negative Commerce Clause is to determine whether it “regulates evenhandedly with only ‘incidental’ effects on interstate commerce, or discriminates against interstate commerce … ” As we use the term here, “discrimination” simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. If a restriction on commerce is discriminatory, it is virtually per se invalid …

Oregon’s $2.25 per ton surcharge is discriminatory on its face. The surcharge subjects waste from other States to a fee almost three times greater than the $0.85 per ton charge imposed on solid in-state waste. The statutory determinant for which fee applies to any particular shipment of solid waste to an Oregon landfill is whether or not the waste was “generated out-of-state … ”

[T]he surcharge must be invalidated unless respondents can “sho[w] that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” New Energy Co. of Ind. v. Limbach, (1988) … Our cases require that justifications for discriminatory restrictions on commerce pass the “strictest scrutiny … ”

Respondents’ principal defense of the higher surcharge on out-of-state waste is that it is a “compensatory tax” necessary to make shippers of such waste pay their “fair share” of the costs imposed on Oregon by the disposal of their waste in the State. In Chemical Waste v. Hunt (1992), we noted the possibility that such an argument might justify a discriminatory surcharge or tax on out-of-state waste. In making that observation, we implicitly recognized the settled principle that interstate commerce may be made to “ ‘pay its way.’ ” Complete Auto Transit, Inc. v. Brady, (1977) …

To justify a charge on interstate commerce as a compensatory tax, a State must, as a threshold matter, “identif[y] … the [intrastate tax] burden for which the State is attempting to compensate.” Once that burden has been identified, the tax on interstate commerce must be shown roughly to approximate—but not exceed— the amount of the tax on intrastate commerce … Finally, the events on which the interstate and intrastate taxes are imposed must be “substantially equivalent”; that is, they must be sufficiently similar in substance to serve as mutually exclusive “prox[ies]” for each other …

Although it is often no mean feat to determine whether a challenged tax is a compensatory tax, we have little difficulty concluding that the Oregon surcharge is not such a tax. Oregon does not impose a specific charge of at least $2.25 per ton on shippers of waste generated in Oregon, for which the out-of-state surcharge might be considered compensatory. In fact, the only analogous charge on the disposal of Oregon waste is $0.85 per ton, approximately one-third of the amount imposed on waste from other States … Respondents’ failure to identify a specific charge on intrastate commerce equal to or exceeding the surcharge is fatal to their claim.

Respondents argue that, despite the absence of a specific $2.25 per ton charge on in-state waste, intrastate commerce does pay its share of the costs underlying the surcharge through general taxation. Whether or not that is true is difficult to determine, as “[general] tax payments are received for the general purposes of the [government], and are, upon proper receipt, lost in the general revenues.” Flast v. Cohen, (1968) (Harlan, J., dissenting). Even assuming, however, that various other means of general taxation, such as income taxes, could serve as an identifiable intrastate burden roughly equivalent to the out-of-state surcharge, respondents’ compensatory tax argument fails because the in-state and out-of-state levies are not imposed on substantially equivalent events …

Indeed, the very fact that in-state shippers of out-of-state waste, such as Oregon Waste, are charged the out-of-state surcharge even though they pay Oregon income taxes refutes respondents’ argument that the respective taxable events are substantially equivalent. We conclude that, far from being substantially equivalent, taxes on earning income and utilizing Oregon landfills are “entirely different kind[s] of tax[es] … ”

[B]ecause all citizens of Oregon benefit from the proper in-state disposal of waste from Oregon, respondents claim it is only proper for Oregon to require them to bear more of the costs of disposing of such waste in the State through a higher general tax burden. At the same time, however, Oregon citizens should not be required to bear the costs of disposing of out-of-state waste, respondents claim. The necessary result of that limited cost shifting is to require shippers of out-of-state waste to bear the full costs of in-state disposal, but to permit shippers of Oregon waste to bear less than the full cost.

We fail to perceive any distinction between respondents’ contention and a claim that the State has an interest in reducing the costs of handling in-state waste … To give controlling effect to respondents’ characterization of Oregon’s tax scheme as seemingly benign cost spreading would require us to overlook the fact that the scheme necessarily incorporates a protectionist objective as well …

Respondents counter that if Oregon is engaged in any form of protectionism, it is “resource protectionism,” not economic protectionism. It is true that by discouraging the flow of out-of-state waste into Oregon landfills, the higher surcharge on waste from other States conserves more space in those landfills for waste generated in Oregon. Recharacterizing the surcharge as resource protectionism hardly advances respondents’ cause, however. Even assuming that landfill space is a “natural resource,” “a State may not accord its own inhabitants a preferred right of access over consumers in other States to natural resources located within its borders … ”

We recognize that the States have broad discretion to configure their systems of taxation as they deem appropriate … All we intimate here is that their discretion in this regard, as in all others, is bounded by any relevant limitations of the Federal Constitution, in these cases the negative Commerce Clause. Because respondents have offered no legitimate reason to subject waste generated in other States to a discriminatory surcharge approximately three times as high as that imposed on waste generated in Oregon, the surcharge is facially invalid under the negative Commerce Clause. Accordingly, the judgment of the Oregon Supreme Court is reversed, and the cases are remanded for further proceedings not inconsistent with this opinion.

It is so ordered.

Chief Justice Rehnquist, with whom Justice Blackmun joins, dissenting.

Landfill space evaporates as solid waste accumulates. State and local governments expend financial and political capital to develop trash control systems that are efficient, lawful, and protective of the environment. The State of Oregon responsibly attempted to address its solid waste disposal problem through enactment of a comprehensive regulatory scheme for the management, disposal, reduction, and recycling of solid waste … The regulatory scheme included a fee charged on out-of-state solid waste. The Oregon Legislature directed the Environmental Quality Commission to determine the appropriate surcharge “based on the costs … of disposing of solid waste generated out-of-state … ” The surcharge works out to an increase of about $0.14 per week for the typical out-of-state solid waste producer. This seems a small price to pay for the right to deposit your “garbage, rubbish, refuse … ; sewage sludge, septic tank and cesspool pumpings or other sludge; … manure, … dead animals, [and] infectious waste” on your neighbors …

Once again, however, as in Philadelphia and Chemical Waste Management, the Court further cranks the dormant Commerce Clause ratchet against the States by striking down such cost-based fees, and by so doing ties the hands of the States in addressing the vexing national problem of solid waste disposal …

Under current projections, Americans will produce 222 million tons of garbage in the year 2000. Generating solid waste has never been a problem. Finding environmentally safe disposal sites has. By 1991, it was estimated that 45 percent of all solid waste landfills in the Nation had reached capacity. Nevertheless, the Court stubbornly refuses to acknowledge that a clean and healthy environment, unthreatened by the improper disposal of solid waste, is the commodity really at issue in cases such as these …

[T]he Court notes that it has “little difficulty,” concluding that the Oregon surcharge does not operate as a compensatory tax, designed to offset the loss of available landfill space in the State caused by the influx of out-of-state waste. The Court reaches this nonchalant conclusion because the State has failed “to identify a specific charge on intrastate commerce equal to or exceeding the surcharge.” (emphasis added). The Court’s myopic focus on “differential fees” ignores the fact that in-state producers of solid waste support the Oregon regulatory program through state income taxes and by paying, indirectly, the numerous fees imposed on landfill operators and the dumping fee on in-state waste …

The availability of safe landfill disposal sites in Oregon did not occur by chance. Through its regulatory scheme, the State of Oregon inspects landfill sites, monitors waste streams, promotes recycling, and imposes an $0.85 per ton disposal fee on in-state waste … all in an effort to curb the threat that its residents will harm the environment and create health and safety problems through excessive and unmonitored solid waste disposal. Depletion of a clean and safe environment will follow if Oregon must accept out-of-state waste at its landfills without a sharing of the disposal costs. The Commerce Clause does not require a State to abide this outcome …

Far from neutralizing the economic situation for Oregon producers and out-of-state producers, the Court’s analysis turns the Commerce Clause on its head. Oregon’s neighbors will operate under a competitive advantage against their Oregon counterparts as they can now produce solid waste with reckless abandon and avoid paying concomitant state taxes to develop new landfills and clean up retired landfill sites … Petitioners do not buy garbage to put in their landfills; solid waste producers pay petitioners to take their waste … Thus, the fees do not alter the price of a product that is competing with other products for common purchasers. If anything, striking down the fees works to the disadvantage of Oregon businesses. They alone will have to pay the “nondisposal” fees associated with solid waste: landfill siting, landfill cleanup, insurance to cover environmental accidents, and transportation improvement costs associated with out-of-state waste being shipped into the State …

The Court asserts that the State has not offered “any safety or health reason[s]” for discouraging the flow of solid waste into Oregon. I disagree. The availability of environmentally sound landfill space and the proper disposal of solid waste strike me as justifiable “safety or health” rationales for the fee …

The Court begrudgingly concedes that interstate commerce may be made to “pay its way,” (internal quotation marks omitted), yet finds Oregon’s nominal surcharge to exact more than a “ ‘just share’ ” from interstate commerce … It escapes me how an additional $0.14 per week cost for the average solid waste producer constitutes anything but the type of “incidental effects on interstate commerce” endorsed by the majority …

The State of Oregon is not prohibiting the export of solid waste from neighboring States; it is only asking that those neighbors pay their fair share for the use of Oregon landfill sites. I see nothing in the Commerce Clause that compels less densely populated States to serve as the low-cost dumping grounds for their neighbors, suffering the attendant risks that solid waste landfills present. The Court, deciding otherwise, further limits the dwindling options available to States as they contend with the environmental, health, safety, and political challenges posed by the problem of solid waste disposal in modern society.

For the foregoing reasons, I respectfully dissent.


South Dakota v. Wayfair (2018)

585 U.S. ___ (2018)

Decision: Vacated and remanded
Vote: 5-4
Majority: Kennedy, joined by Thomas, Ginsburg, Alito, and Gorsuch
Concur: Thomas
Concur: Gorsuch
Dissent: Roberts, joined by Breyer, Sotomayor, and Kagan

Justice Kennedy delivered the opinion of the Court.

When a consumer purchases goods or services, the consumer’s State often imposes a sales tax. This case requires the Court to determine when an out-of-state seller can be required to collect and remit that tax. All concede that taxing the sales in question here is lawful. The question is whether the out-of-state seller can be held responsible for its payment, and this turns on a proper interpretation of the Commerce Clause, U. S. Const., Art. I, §8, cl. 3.

In two earlier cases the Court held that an out-of-state seller’s liability to collect and remit the tax to the consumer’s State depended on whether the seller had a physical presence in that State, but that mere shipment of goods into the consumer’s State, following an order from a catalog, did not satisfy the physical presence requirement. National Bellas Hess, Inc. v. Department of Revenue of Ill., (1967); Quill Corp. v. North Dakota, (1992). The Court granted certiorari here to reconsider the scope and validity of the physical presence rule mandated by those cases.

Like most States, South Dakota … taxes the retail sales of goods and services in the State … Sellers are generally required to collect and remit this tax to the Department of Revenue …

Under this Court’s decisions in Bellas Hess and Quill, South Dakota may not require a business to collect its sales tax if the business lacks a physical presence in the State. Without that physical presence, South Dakota instead must rely on its residents to pay the use tax owed on their purchases from out-of-state sellers. “[T]he impracticability of [this] collection from the multitude of individual purchasers is obvious.” National Geographic Soc. v. California Bd. of Equalization, (1977). And consumer compliance rates are notoriously low … It is estimated that Bellas Hess and Quill cause the States to lose between $8 and $33 billion every year … In South Dakota alone, the Department of Revenue estimates revenue loss at $48 to $58 million annually. Particularly because South Dakota has no state income tax, it must put substantial reliance on its sales and use taxes for the revenue necessary to fund essential services. Those taxes account for over 60 percent of its general fund …

The legislature found that the inability to collect sales tax from remote sellers was “seriously eroding the sales tax base” and “causing revenue losses and imminent harm … through the loss of critical funding for state and local services … ”

To that end, the Act requires out-of-state sellers to collect and remit sales tax “as if the seller had a physical presence in the state.” §1. The Act applies only to 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. The Act also forecloses the retroactive application of this requirement and provides means for the Act to be appropriately stayed until the constitutionality of the law has been clearly established.

Respondents Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., are merchants with no employees or real estate in South Dakota. Each of these three companies ships its goods directly to purchasers throughout the United States, including South Dakota. Each easily meets the minimum sales or transactions requirement of the Act, but none collects South Dakota sales tax …

South Dakota filed a declaratory judgment action against respondents in state court, seeking a declaration that the requirements of the Act are valid and applicable to respondents … Respondents moved for summary judgment, arguing that the Act is unconstitutional … South Dakota conceded that the Act cannot survive under Bellas Hess and Quill but asserted the importance, indeed the necessity, of asking this Court to review those earlier decisions in light of current economic realities …

The South Dakota Supreme Court … stated: “However persuasive the State’s arguments on the merits of revisiting the issue, Quill has not been overruled [and] remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes.” This Court granted certiorari …

The Constitution grants Congress the power “[t]o regulate Commerce … among the several States.” Art. I, §8, cl. 3 … Although the Commerce Clause is written as an affirmative grant of authority to Congress, this Court has long held that in some instances it imposes limitations on the States absent congressional action. Of course, when Congress exercises its power to regulate commerce by enacting legislation, the legislation controls. Southern Pacific Co. v. Arizona ex rel. Sullivan, (1945). But this Court has observed that “in general Congress has left it to the courts to formulate the rules” to preserve “the free flow of interstate commerce … ”

The central dispute is whether South Dakota may require remote sellers to collect and remit the tax without some additional connection to the State …

When considering whether a State may levy a tax, Due Process and Commerce Clause standards may not be identical or coterminous, but there are significant parallels. The reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for an out-of-state seller’s liability to remit sales taxes …

The Quill majority expressed concern that without the physical presence rule “a state tax might unduly burden interstate commerce” by subjecting retailers to tax-collection obligations in thousands of different taxing jurisdictions. Id., at 313, n. 6. But the administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State. For example, a business with one salesperson in each State must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every State need not collect sales taxes on otherwise identical nationwide sales.

The Court has consistently explained that the Commerce Clause was designed to prevent States from engaging in economic discrimination so they would not divide into isolated, separable units. But it is “not the purpose of the [C]ommerce [C]lause to relieve those engaged in interstate commerce from their just share of state tax burden.” Complete Auto …

Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers. Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own … In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced.

Worse still, the rule produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable. The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders. Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedents. This Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State …

The “dramatic technological and social changes” of our “increasingly interconnected economy” mean that buyers are “closer to most major retailers” than ever before—“regardless of how close or far the nearest storefront.” Direct Marketing Assn. v. Brohl, (2015) (Kennedy, J., concurring). Between targeted advertising and instant access to most consumers via any internet-enabled device, “a business may be present in a State in a meaningful way without” that presence “being physical in the traditional sense of the term.”  A virtual showroom can show far more inventory, in far more detail, and with greater opportunities for consumer and seller interaction than might be possible for local stores. Yet the continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant. This Court should not maintain a rule that ignores these substantial virtual connections to the State …

In essence, respondents ask this Court to retain a rule that allows their customers to escape payment of sales taxes—taxes that are essential to create and secure the active market they supply with goods and services. An example may suffice. Wayfair offers to sell a vast selection of furnishings. Its advertising seeks to create an image of beautiful, peaceful homes, but it also says that “ ‘[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.’ ” What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments. State taxes fund the police and fire departments that protect the homes containing their customers’ furniture and ensure goods are safely delivered; maintain the public roads and municipal services that allow communication with and access to customers … and help create the “climate of consumer confidence” that facilitates sales. According to respondents, it is unfair to stymie their tax-free solicitation of customers. But there is nothing unfair about requiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collection. Fairness dictates quite the opposite result. Helping respondents’ customers evade a lawful tax unfairly shifts to those consumers who buy from their competitors with a physical presence that satisfies Quill—even one warehouse or one salesperson—an increased share of the taxes …

For these reasons, the Court concludes that the physical presence rule of Quill is unsound and incorrect. The Court’s decisions in Quill … and National Bellas Hess … should be, and now are, overruled.

In the absence of Quill and Bellas Hess, the first prong of the Complete Auto test simply asks whether the tax applies to an activity with a substantial nexus with the taxing State …

Here, the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State. The Act applies only to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the State on an annual basis. This quantity of business could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota. And respondents are large, national companies that undoubtedly maintain an extensive virtual presence. Thus, the substantial nexus requirement of Complete Auto is satisfied in this case …

South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement … It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State …

The judgment of the Supreme Court of South Dakota is vacated, and the case is remanded for further proceedings not inconsistent with this opinion.

It is so ordered.

Chief Justice Roberts, with whom Justice Breyer, Justice Sotomayor, and Justice Kagan join, dissenting.

In National Bellas Hess, Inc. v. Department of Revenue of Ill., (1967), this Court held that, under the dormant Commerce Clause, a State could not require retailers without a physical presence in that State to collect taxes on the sale of goods to its residents. A quarter century later, in Quill Corp. v. North Dakota, (1992), this Court was invited to overrule Bellas Hess but declined to do so. Another quarter century has passed, and another State now asks us to abandon the physical-presence rule. I would decline that invitation as well.

I agree that Bellas Hess was wrongly decided, for many of the reasons given by the Court. The Court argues in favor of overturning that decision because the “Internet’s prevalence and power have changed the dynamics of the national economy.” Ante, at 18. But that is the very reason I oppose discarding the physical-presence rule. E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.

This Court “does not overturn its precedents lightly.” Michigan v. Bay Mills Indian Community, (2014) … The bar is even higher in fields in which Congress “exercises primary authority” and can, if it wishes, override this Court’s decisions with contrary legislation. Bay Mills …

We have applied this heightened form of stare decisis in the dormant Commerce Clause context … But because Congress “has plenary power to regulate commerce among the States,” Quill, it may at any time replace such judicial rules with legislation of its own …

In Quill, this Court emphasized that the decision to hew to the physical-presence rule on stare decisis grounds was “made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.” … The Court thus left it to Congress “to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.” Id …

This is neither the first, nor the second, but the third time this Court has been asked whether a State may obligate sellers with no physical presence within its borders to collect tax on sales to residents. Whatever salience the adage “third time’s a charm” has in daily life, it is a poor guide to Supreme Court decisionmaking …

An erroneous decision from this Court may well have been an unintended factor contributing to the growth of e-commerce. See, e.g., W. Taylor, Who’s Writing the Book on Web Business? Fast Company (Oct. 31, 1996), https: // www.fastcompany.com / 27309 / whos-writing-book-web-business. The Court is of course correct that the Nation’s economy has changed dramatically since the time that Bellas Hess and Quill roamed the earth. I fear the Court today is compounding its past error by trying to fix it in a totally different era. The Constitution gives Congress the power “[t]o regulate Commerce … among the several States.” Art. I, §8. I would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.

I respectfully dissent.


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