My couch seems too comfortable to have constitutional significance. My wife and I bought it a few months ago from an Internet firm called Wayfair. We didn’t pay sales tax because we live in New Hampshire, but if we still lived in Massachusetts and paid the tax, I wouldn’t have thought much about it. But Wayfair doesn’t think that this form of taxation is constitutionally permissible and I read Wayfair sitting on my Wayfair couch. Wayfair provided me a pleasant place to read the decision that ruled against them, grounded in a persuasive description of the new social facts of the Internet. But not everyone is persuaded. The case not only raises questions of great significance for the U.S. economy, but also addresses how the Court should deal with questions of the shifting social facts of our society.
The Case
South Dakota v. Wayfair , Inc. was decided 5 to 4. Kennedy wrote the Court’s decision, joined by Alito , Ginsburg, Gorsuch, and Thomas . Chief Justice Roberts dissented, joined by Breyer , Kagan , and Sotomayor . These somewhat unusual coalitions reflect the nature of the dispute: Wayfair is more about how the Court deals with social facts than constitutional principles, leading to strange bedfellows regarding Wayfair’s furniture.
The case is about the constitutionality of taxation , specifically the power of a state to levy sales tax on a company that only does business with the state’s citizens over the Internet, with no physical presence within the boundaries of the state. The suit focuses on South Dakota, but the decision notes that “forty-one States, two Territories, and the District of Columbia now ask this Court” to uphold South Dakota’s position.1 The economic meaning of the outcome is expansive. According to the Stanford Law Review, “the world of internet commerce was shaken to its foundations” by the decision.2 The day after the decision was announced, business and tech media outlets weighed in on their perceptions of its meaning: “Supreme Court’s Internet Sales Tax Ruling May Be a Nightmare for Small Businesses” was the headline at The Verge, an online tech magazine; “The end result of the ruling will be an increase in tax revenue for states and higher operating costs for internet sales companies, which will inevitably translate into higher costs for consumers” said MarketWatch.com; The Wall Street Journal called the decision “a milestone marking e-commerce’s treatment as a mature player in a marketplace no longer defined by trips to the corner store or the shopping mall.”3 The editorial board of the Journal described it the day it was announced as “a ruling that liberates state and local politicians to tax the internet nationwide with abandon.”4 Internet sales have grown considerably in the last decade and are now massive. Wayfair alone had net revenues of $4.7 billion in 2017. The South Dakota Department of Revenue estimates potential tax revenues for the state rising to $48–$58 million each year, a very large amount of money for states like South Dakota that have no income tax and rely on alternative sources of revenue. But a state’s need for funding does not make its actions constitutional, even if South Dakota asserts that “an emergency is hereby declared to exist,” as they did in the state law enacted in 2016.5
One way to describe any objection that a government action is unconstitutional is to focus on what is being said about powers and rights: Does the government have the power, and does the government’s action violate a right? Generally speaking, for any action to be constitutional, the answers must be Yes and No. The wrong answer to either question creates a constitutional violation. In Wayfair, there is no claim of a citizen right, as there is no recognized right against taxation . There are limits to taxation, as in the prohibitions against certain forms of taxation in the original Constitution, followed by the expansion of the government power to tax in the Sixteenth Amendment, specifically allowing for income taxes on individuals. In addition to the neutral search for government revenue—we must pay for roads and armies—any form of taxation has consequences for society and creates incentives for individuals. Any specific incentive could be unintentional or deeply intended by a legislature, but taxation is a constitutional power of government unless it crosses the line into coercion that violates a specific right. In the South Dakota case, no one seriously argues that a state cannot tax its citizens when they buy something: states have this power and individuals have no right against it. But do states have the power to tax companies that reside in other states and have no physical presence in the taxing state? There is no constitutional right of citizens of South Dakota to not be taxed when they buy something online that will be shipped from South Carolina, but does South Dakota have the power to lay that tax?
The Interstate Commerce Clause in Reverse
The first paragraph of the majority decision states that the ruling “turns on a proper interpretation of the Commerce Clause .”6 The first sentence of the dissent clarifies that it is the Dormant Commerce Clause that is really at issue. This constitutional concept is also known as the Negative Commerce Clause . If the national government has control over interstate commerce (the power to “regulate commerce… among the several states”), then individual states cannot have this power and therefore are forbidden from doing anything that substantially interferes with interstate trade. States have the clear power to regulate local trade conditions for the safety or health of their citizens, but they cannot block or inhibit trade that crosses state boundaries. Obviously, states have incentives to do so: they may want to favor their own businesses to the disadvantage of companies from other states. But they cannot do that under the DCC.
This doctrine is not exactly clear in the text of the Constitution. It is an extension of the literal Commerce Clause by inference, and not everyone agrees that it is what the Constitution means. But a history of Supreme Court rulings has defined it in a specific way: states may not discriminate against interstate commerce or unduly burden interstate commerce.7 In this reading of the document, the negative command of the Commerce Clause was a large part of the point (Congress has the positive authority to regulate interstate trade, while individual states are commanded to not interfere in this realm). However, specific applications of the rule that states can regulate commerce within their borders, but not outside their borders, run into practical problems. Undue burden standards are notoriously subjective, mostly because they rely on facts rather than on principles: to what degree is a state law burdening commerce in the real world of facts?
One way to understand the DCC is that in-state and out-of-state companies are meant to be on the same playing field, without advantage to one side. In this view, the DCC meant to curtail advantages and market distortions. The majority sees the current rule as somewhat perverse in this sense, because it “puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage to remote sellers” (because in-state companies pay sales tax, while out-of-state internet firms do not).8 The majority points out that Wayfair went so far as to advertise that its customers did not have to pay sales tax; hence the current rule “has come to serve as a judicially created tax shelter” and “rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court’s precedent .”9 As Justice Gorsuch phrases it in his concurrence, this is “a judicially created tax break for out-of-state Internet and mail-order firms at the expense of in-state brick-and-mortar rivals.”10
However, the DCC may not be real. If the Commerce Clause limits the states as well as empowers the Congress, the Constitution could have said so explicitly, but it does not. According to Justice Thomas , “the negative Commerce Clause has no basis in the Constitution and has proved unworkable in practice.”11 Chief Justice Roberts in his dissent argues that these decisions should be left to Congress and not seized by the Court. But until the Congress acts (if it ever does), does that mean South Dakota can do it or that South Dakota cannot do it? What is the default ruling until the Congress decides? The default may be to let states do what they want (and Congress will supersede those laws and settle a national rule if it feels the need); or the default may be to uphold the rule that is most open to free trade; or as Chief Justice Roberts argues, the precedents dictate a default: leave things as they have been.
Precedent and Reliance Interests
In the view of the dissenters , this is not the first time the Court has addressed this issue. Two precedents over the last fifty years have offered a standard. According to Bellas Hess in 1967, a mail-order company “whose only connection with customers in the State is by common carrier or the U.S. mail” lacked a minimum requirement of a connection to the state (a “nexus”) to allow for taxation . That decision was decided 6 to 3. Twenty-five years later in 1992, the Court reaffirmed the physical presence rule in Quill (this time against North Dakota).12 But again, there was dissent; according to Justice Byron White, “there is no relationship between the physical presence/nexus rule the Court retains and Commerce Clause considerations that allegedly justify it.”13 Should the current Court simply follow the precedent that states cannot tax the transactions of companies outside their borders?
One aspect of this question is reliance interests, or the expectations that citizens hold and the plans they have made based on the Court’s prior rulings. Even the majority concedes that “reliance interests are a legitimate consideration when the Court weighs adherence to an earlier but flawed precedent .”14 The dissenters emphasize “the potential to disrupt the development of such a critical segment of the economy.”15 If a company has to master the tax laws of every state, this may create a substantial burden on trade. On the other hand, the majority suggests that software will soon be available to make this simple for companies to do. And no small mom and pop Internet stores need to worry: The South Dakota law only applies to sellers who make at least 200 transactions in the state or ship more than $100,000 worth of goods annually.
whether the rule has proven to be intolerable simply in defying practical workability; whether the rule is subject to a kind of reliance that would lend a special hardship to the consequences of overruling…; whether related principles of law have so far developed as to have left the old rule no more than a remnant of abandoned doctrine; or whether facts have so changed, or come to be seen so differently, as to have robbed the old rule of significant application or justification.16 (italics added)
Of the four standards identified in Casey (workability, reliance, errors in constitutional principles, and changes in prevailing facts), the Wayfair decision depends on the last one: have the facts changed? The majority decision is quite clear that South Dakota is “asking this Court to review these earlier decisions in light of current economic realties.”17 The prior decisions dealt with taxation , but not the new realities of the Internet. This case is not about mail-order, as the precedents are. It is about an entirely different kind of commerce. If e-commerce is not at all comparable to mail-order, then the facts have changed, and the precedents may have to be abandoned.
Social Facts
Along with constitutional principles that are disputed on the basis of the text and history of the document, the Court also has to define social facts that reflect divided perceptions of reality.18 How the Supreme Court handles questions of disputed social facts—for example, the influence of racism (as in Shelby County in 2013)19 or the nature of gender differences (as in Wal-Mart v. Dukes in 2011)—reflects an underlying debate about our constitutional democracy: who should determine influential social facts when they have come into dispute in our society?
Sometimes the Court cites expert judgment as the basis for a social fact, while at other times, the Court defers to the judgment of one of our representative institutions, like Congress, or a state legislature, or the executive branch.20 But most of the time, the Justices rely on their own judgment of social facts and provide little justification. In the past, the Court as well as Court-watchers seemed to have assumed that facts were more clear, while principles were hard. This may have reversed: principles are well developed and justified (even if disputed), while perceptions of facts have fractured and the justifications for upholding one factual perception or another are deeply uncertain.21
In deciding such questions, does Congress have the better means of researching and perceiving social facts , or should the Court fill this function? Chief Justice Roberts in dissent emphasizes the role of Congress in determining facts: “As we have said in other DCC cases, Congress has the capacity to investigate and analyze facts beyond anything the Judiciary could match.”22 For this reason and for the preservation of precedent , he “would let Congress decide whether to depart from the physical-presence rule that has governed this area for half a century.”23
The majority of Justices, however, saw the changes in social facts as compelling regardless of congressional approval. The decision quotes approvingly of several scholars who perceive very different facts between 1992 and 2018, including Walter Hellerstein in the Harvard Journal of Law & Technology, who argued in 2000 that we need “rules that are appropriate to the twenty-first century, not the nineteenth.”24 The Court concludes that “each year, the physical presence rule becomes further removed from economic reality.”25 Wayfair recognizes that the contemporary economy and Internet have changed, creating a company’s presence in a state even when there is no physical presence : “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… This Court should not maintain a rule that ignores these substantial virtual connections to the State.”26 In this sense, “the Internet’s prevalence and power have changed the dynamics of the national economy.”27 With this in mind, the Court then corrected the previous “false constitutional premise,” because “when it decided Quill [in 1992], the Court could not have envisioned a world in which the world’s largest retailer would be a remote seller [Amazon].”28 The social facts of the Internet—and hence of commerce—had clearly changed.
Conclusion
Wayfair is about the meaning of the Commerce Clause, but it is more about the meaning of changing social facts and how we recognize them. Some citizens perceive new facts and want the Court to endorse them; they see past precedent as less important than current reality. Others want to leave decisions about prevailing facts to the representative process and defer to Congress, leaving prior rulings in place until democracy takes its course. These approaches to perceptions of facts cut across the common divide between advocates of a living or an original Constitution, and hence Wayfair is an unusual kind of 5-4 decision. It may be fitting for Wayfair to be Kennedy’s last majority opinion, emphasizing his willingness to place evolving social facts at the core of constitutional interpretation.