WASHINGTON -- South Dakota has become what South Carolina once was -- stubborn, pugnacious and wrong. In 1860, South Carolina became the first state to vote to secede. In 2016, South Dakota's legislature picked a fight in the hope that the U.S. Supreme Court would reverse a prior decision, thereby handing the state a policy victory it failed to win in Congress.
South Dakota has enacted a law contradicting a 26-year-old court decision concerning interstate commerce, and a law Congress passed and extended 10 times. The state wants to tax purchases that are made online from vendors that have no physical presence in the state. South Dakota wants to increase its revenue and mollify its Main Street merchants. On Tuesday, the court will hear oral arguments for and against South Dakota's response to the greatest disruption of retailing since the Sears, Roebuck catalog, more about which anon.
In 1992, in the internet's infancy, the court held that retailers are required to collect a state's sales taxes only when the retailers have a "substantial nexus" -- basically, a physical, brick-and-mortar presence -- in the state where the item sold is purchased. Such a nexus would mean that the retailer benefits from, and should pay for, local government services. Absent such a nexus, however, states' taxation of sales would violate the Constitution, which vests in Congress alone the power to impose such burdens on interstate commerce. Furthermore, Richard A. Epstein of the University of Chicago and New York University law school, says the 14th Amendment's due process clause ("no state shall ... deprive any person of life, liberty or property, without due process of law") is a guarantee of fundamental fairness "powerful enough to shield any party from taxation by a jurisdiction with which it does not interact."
Internet commerce has burgeoned partly because many online retailers, by not collecting sales taxes, enjoy price advantages. This, however, is less valuable to them than their other advantages of convenience (no need to drive somewhere to shop) and choices (almost everything saleable is sold online). Such commerce could not have flourished if vendors bore the burden of deciphering and complying with the tax policies of 12,000 state and local taxing jurisdictions, with different goods exempted from taxation. So, in 1998 Congress enacted the Internet Tax Freedom Act (it was made permanent in 2016). This expresses Congress' policy choice to prohibit state and local governments from imposing unique tax rules for Internet transactions.
The ITFA, an exercise of Congress' enumerated power to regulate interstate commerce, is intended to shield small internet sellers from discriminatory taxes and compliance burdens. (Amazon pays sales taxes in all the 45 states that have them.) In 1998, the ITFA passed the House by unanimous consent and the Senate 96-2. For revenue reasons, only four governors endorsed it. Now South Dakota is seeking the court's permission for its extraterritorial grasping. It wants the court to overrule this congressional policy calculation: The social benefits of dynamic internet commerce, with small companies enabled to compete with large ones, exceed the costs to traditional retailers, such as Sears, which once upon a time was a problem for then-traditional retailers.
Late in the 19th century, the Sears, Roebuck catalog was a retailing response to what government had directly (the Homestead Act) and indirectly (government-subsidized railroads) created -- vast, thinly populated swaths of rural America where farm families had few if any shopping opportunities. By 1898, the catalog had 583 pages. In 1907, when the nation's population was 87 million, Sears mailed out 3 million catalog. In 1927, the nation of 119 million received 75 million Sears catalogs and other mailings, helped by another government program -- rural free delivery. Some traditional downtown retailers were annoyed, not for the last time: Walmart and other "big box" stores were coming to the edge of town.
South Dakota's impertinent law reflects this fact: Governments often are reflexively reactionary when new technologies discomfort established interests with which the political class has comfortable relations of mutual support. The state's sales tax revenues have grown faster than the state's economy even as internet retailing has grown. Its brick-and-mortar retailing survived Sears, Roebuck, and then survived Walmart (often better than Sears, Roebuck has). Indeed, many brick-and-mortar retailers are now bricks-and-clicks enterprises, offering online shopping.
Traditional retailing will, like Walmart (which is now being challenged by Amazon), prosper or not depending on market forces, meaning Americans' preferences. State governments should not try to prevent this wholesome churning from going where it will.