The Supreme Court Completes Its Inversion of the Commerce Clause
In its ruling on South Dakota v. Wayfair—basically, the ruling that means you will now have to pay goddamned sales tax on everything you buy online—the Supreme Court has completed the long arc of its interpretation of the Interstate Commerce Clause. It has taken a constitutional provision whose original purpose was to limit the power of government to interfere with commerce and turned it into an unlimited mandate for government to interfere with everything—not just the federal government, but now also the state governments.
The really gruesome irony is that this was completed, not by the Court's liberal judges, who mostly shrank from the task, but by its conservatives.
First, let's talk about the Interstate Commerce Clause. The idea for the US Constitution grew out of a convention intended specifically to address the crisis of state governments exercising too much power over commerce—imposing tariffs and taxes on trade moving through their states and basically acting as if a state government's need for money was all the authorization it required to grab it from whatever commercial activity was within its reach. So the Constitution specifically gave to Congress, and to the federal government, the power to "regulate commerce with foreign nations, and among the several states." The idea was to give this power to the federal government to prevent the states from abusing it. Naturally, the federal government went on to abuse it in their place.
The Commerce Clause has most famously been used, in conjunction with the "General Welfare Clause" to give the federal government carte blanche to do anything it likes. The General Welfare Clause is used to grant the government unlimited authority to tax and spend, so long as they claim they're doing it for our good. The Commerce Clause is used to give the federal government unlimited power to regulate.
This came up most recently with the Supreme Court's 2012 ruling on the individual mandate in Obamacare. Defenders of the individual mandate took the modern interpretation of the Commerce Clause to its ultimate conclusion, citing it as justification to regulate a decision not to engage in any commerce at all. The Court declined to uphold the law based on such an unlimited Commerce Clause argument, to the chagrin of today's legal commentators. Instead, the majority rewrote the law ad hoc so they could uphold it under an unlimited power to tax and spend. That's why we keep losing our economic freedom. If they don't get you with one unlimited grant of power, they get you with another.
The Court's new ruling in South Dakota v. Wayfair takes the worst of this expansive Commerce Clause jurisprudence and applies it in a new direction: as an authorization for money grabs by state governments, too. Make no mistake, that's what this is all about, quite openly and explicitly. Justice Kennedy's majority opinion opens by wailing about how much money South Dakota "loses"—the usual word for "is not allowed to steal"—because it is not able to tax out-of-state online retailers like Wayfair. Kennedy seems positively outraged by this "extraordinary imposition by the Judiciary on States' authority to collect taxes." Yes, heaven forbid anyone should stand in the way of a state government rifling through our pockets. It is clear that Kennedy has been itching for some time to overturn two previous court rulings, going back to National Bellas Hess v. Illinois in 1967, that upheld this out-of-state tax immunity for mail-order retailers, then re-affirmed it for online retailers in 1992.
The rationale for overturning these previous rulings is pretty flimsy, as we'll see in a moment. But the overall effect is to reject what is known as Dormant Commerce Clause jurisprudence, which is the idea that the federal government's power over interstate trade is so dominant that in the absence of any federal law regulating a particular form of trade (an increasingly unlikely condition), the presumption should be against the states' ability to regulate it. Now the presumption will be in favor of the states' ability to tax and regulate trade across state borders, opening up a whole now realm of mischief.
To understand what's wrong with this ruling, let's look at what is really happening when a South Dakotan orders a piece of furniture from Wayfair. The sale does not take place in South Dakota. If it takes place anywhere, it takes place on the Internet servers that support Wayfair's website. Given that Wayfair has no physical presence in South Dakota, those servers are almost certainly located elsewhere. More to the point, the sale takes place on the Internet. It takes place through a medium of interstate communication, just like orders previously sent through the mail or by telephone.
So if the sale does not take place in South Dakota, what is South Dakota really taxing? It is taxing the act of shipping the customer's goods across state lines. This is an interstate import tariff. The fact that this tariff is intended to equalize the prices of cross-border sales compared to in-state sales does not change that fact, any more than US steel tariffs cease to become tariffs because the president claims he's balancing out Canadian restrictions on dairy imports.
This becomes even clearer if you ask how a state would have to go about enforcing this kind of out-of-state sales tax if the retailer (and its home state) refused to actively lend their assistance. Kennedy cites the following semi-hypothetical example.
Consider, for example, two businesses that sell furniture online. The first stocks a few items of inventory in a small warehouse in North Sioux City, South Dakota. The second uses a major warehouse just across the border in South Sioux City, Nebraska, and maintains a sophisticated website with a virtual showroom accessible in every State, including South Dakota. By reason of its physical presence, the first business must collect and remit a tax on all of its sales to customers from South Dakota, even those sales that have nothing to do with the warehouse. But, under Quill, the second, hypothetical seller cannot be subject to the same tax for the sales of the same items made through a pervasive Internet presence. This distinction simply makes no sense.
Anyone who has ever lived near a state border, particularly a border between two states with significantly different tax rates, knows that this example is not hypothetical. This sort of thing was going on long before the Internet. Everyone who lives in the high-tax state knows that they can just drive across the border to buy what they want—furniture, clothes, groceries, and so on—and drive back with the untaxed goods in the trunks of their cars. It doesn't even have to be immediately across the border. The enormous Mall of America in Bloomington, Minnesota, does brisk business partly because that state exempts clothing from sales taxes.
The logic of this new ruling would authorize South Dakota to force a retailer in Nebraska to collect sales taxes from South Dakotans who physically cross the border to buy them. But how would South Dakota enforce such a decision if the state of Nebraska declines to use its police power on the other state's behalf? They would have to erect border-crossing checkpoints to physically search people's cars for smuggled goods.
Or to take the Internet example, let us suppose someone buys goods online from a mid-sized retailer based in Delaware or Montana—states with no sales taxes—and the retailer's home state chooses not to enforce another state's taxes. (In our system, no individual state can force another state to do anything.) The only way South Dakota could enforce its out-of-state tax would be to monitor and search all parcels entering the state, or to prevent these sales from happening in the first place by blocking access to the offending retailer's website.
In other words, the only way these taxes can be enforced is ultimately through the kind of restrictions on interstate trade that the Commerce Clause and the entire Constitution itself were written to prevent. That's why the Supreme Court was right to decide, for fifty years, that a state's ability to tax requires the retailer's "physical presence" in the state—and a physical presence more substantial than the Sears Catalogue or Kennedy's preposterous insistence that "a business may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term." In the traditional sense of the term? Have basic metaphysical categories like "presence" and "physical" suddenly changed their meanings?
(There are a lot of howlers like this, as when Kennedy declares that in 1992, "the Court could not have envisioned a world in which the world's largest retailer would be a remote seller." Let me introduce you to the Sears Catalogue. I don't know if Sears was ever the world's largest retailer, though it must have been close, but it had exactly the status 100 years ago that Amazon has today.)
Ah, but Justice Kennedy insists that "the Court's Commerce Clause jurisprudence has 'eschewed formalism for a sensitive, case-by-case analysis of purposes and effects.'" This is Anthony Kennedy in his element, unbound by the rigid consistency of "formalism" and able to "sensitively" decided cases of great importance based on how he feels about them. It's what he's famous for.
But it isn't just Kennedy. He was joined in this decision, not just by one of the Court's "liberal" icons, Ruth Bader Ginsburg, but by "conservative" Justices Gorsuch, Alito, and (a stab to my heart) Clarence Thomas. As for the dissenters—Chief Justice Roberts and the Court's other "liberals," Breyer, Sotomayor, and Kagan—they did not dissent on the actual merits of the case, conceding that they agreed with Kennedy. They dissented solely based on judicial deference to Congress.
It's a good case as far as it goes. Congress has had 50 years to change the interstate tax regime formalized by the Court's previous rulings, yet it never chose to do so. But as we saw in Roberts's majority rulings on Obamacare, the principle of judicial deference is no defense of liberty, either.
What is most disturbing about this ruling is not just the legal reasoning but the spirit behind it. It is full of old-fashioned "living constitution" thinking, where the meaning of key constitutional concepts is said to be constantly evolving based on circumstances and "current economic realities" like the unprecedented phenomenon of buying goods across state lines. There is the Court's straining to expand the definition of what constitutes "an activity with a substantial nexus with the taxing state." Maybe the nexus can be found in the penumbra of an emanation. But most of all, what screams out from this ruling is the sense that the needs of government take precedence over everything else, and the laws must be bent to fit. Kennedy keeps railing against an "artificial, anachronistic rule that deprives states of vast revenues," as if we should be morally outraged that the state's revenues are not vast enough. The passage that really stood out to me was this one, very early on in Kennedy's statement of the case.
The [South Dakota] legislature also declared an emergency: "Whereas, this Act is necessary for the support of the state government and its existing public institutions, an emergency is hereby declared to exist."
What is this passage doing in a Supreme Court opinion? How is it relevant to anything? Politicians are always declaring emergencies when they can't seem to get enough of other people's money—or, to be more accurate, when they can't seem to control how much they spend of the money they already have. But their sense of crisis should have no bearing on the law or on the facts of the case. The government's needs should be subordinate to the people's rights. That's the whole point of the Constitution. If the government's self-declared emergencies automatically outweigh constitutional protections for commerce, or for anything else, then what's the point of having a Constitution in the first place?
That such elementary constitutionalist thinking seems to hold no sway, either through indifference or through philosophical confusion, is not only ominous but a bitter disappointment for those of us who had hope for more from the Court's conservatives.