• Ozzie Paez

Tech, strategy and the Constitution


Technology is complicating laws and undermining legal precedent. The Internet has redefined the meaning of interstate commerce, which is integral to the US Constitution. The Supreme Court of the United States (SCOTUS) in its 1992 Quill Corporation vs. North Dakota decision set a ‘property or employee’ standard to limit State taxation of interstate commerce. The Quill decision has been largely overturned. There will be many more cases related to technological advances in coming years. Some will require international adjudication and agreements. Many will affect business models and competitive strategy.

The decision

The Supreme Court in a 5-4 decision sided with South Dakota’s efforts to collect taxes on Internet sales shipped to their State. On-line retailer Wayfair had challenged the constitutionality of the tax. The decision did not break along traditional liberal-conservative lines. Ruth Bader Ginsburg joined four more conservative colleagues in the decision, while conservative Chief Justice Roberts joined three of the court’s more liberal members in dissent. Justice Kennedy justified his support by pointing to “several features” of the South Dakota Law that “appear designed to prevent discrimination against or undue burdens upon interstate commerce”. These included a safe harbor to those who transact only limited business in the state, no retroactive taxation, a system to assist out of state businesses calculate and collect SD State taxes, and no audit liability for sellers who use SD’s system[1].

Analysts are calling the ruling a positive for physical stores and a negative for on-line retailers. Like most SCOTUS decisions, it’s not so simple. Ozzie Paez Research sells products (books) and services over the Internet, so we are impacted by the decision – Right? Not really. I recognized the potential liability years ago and created a store on Amazon. They sell our products and services, we get paid and they handle the taxes. It’s one more valuable service offered by Amazon. Its stock was down after the ruling, but that’s likely because most analysts haven’t considered the full implications. Amazon already hosts thousands of on-line retailers. The ruling guarantees that hundreds of thousands more will be searching for the kinds of services Amazon already provides.

Other potential winners are States with high taxes such as California, Illinois, New Jersey and New York – Right? Not necessarily. Before the ruling, residents and small businesses in these States were using on-line retailers to circumvent paying high taxes on many goods and services. They will now have to pay their States’ high taxes on all purchases. High taxation and regulations have driven tens of thousands of people and businesses out of States like California and New York. The 2018 tax reform bill worsened the disparity by capping the amount of State taxes that could be deducted on Federal Income Taxes[2]. The SCOTUS decision may further incentivize migration from high to low tax States like Texas. Time will tell.

There is one clear loser in the decision: Congress. The Court limited Congress’ power to shape the on-line taxation debate. The decenters on the Court pointed it out and then called on Congress to fix the problem. There have been multiple efforts to address the issue, including two competing proposals, the Remote Transactions Parity Act (RTPA) and Marketplace Fairness Act (MFA). So far, legislators have not agreed on a specific solution. This latest SCOTUS decision my end Congressional attempts to find consensus through the legislative process.

References

[1] Joseph Bishop-Henchman, Supreme Court Decides Wayfair Online Sales Tax Case, June 21, 2018, https://taxfoundation.org/supreme-court-decides-wayfair-online-sales-tax-case/

[2] Robert Frank, editor, 800,000 people are about to flee New York and California because of taxes, say economists, April 24, 2018, CNBC, https://www.cnbc.com/2018/04/26/800000-people-are-about-to-flee-new-york-california-because-of-taxes.html

#Strategy #Internet #SupremeCourt #Internettax