In the early days of the internet, online retailers were able to take advantage of a tax shelter that exempted them from sales taxes in states in which they did not have a physical presence. They used this tax shelter to challenge entrenched incumbents and provide consumers with a bounty of new options.

Now, though, the largest internet retailer, Amazon.com, has a stock market capitalisation more than three times that of the biggest physical retailer, Walmart. Brick-and-mortar stores are struggling across the land. And the tax shelter for online retail is being revoked.

Looked at this way, it all seems like pretty enlightened policy-making. Upstarts were given a leg up that increased competition and consumer choice, and once they succeeded, it was taken away.

One could argue that the tax shelter should have been taken away a decade ago, but hey, it’s hard to get the timing on these things exactly right. Amazon, at least, started collecting sales taxes a year ago in anticipation of the shift.

Upstarts were given a leg up that increased competition and consumer choice, and once they succeeded, it was taken away

This exercise in seemingly enlightened policy-making, though, has been the work not of those elected to make policy, in Congress, or even those appointed by the president to make it, in the regulatory agencies.

Instead, it has been done entirely by the people appointed by the president to decide legal disputes “between a State and Citizens of another State,” to cite the constitutional language that seems most appropriate in this case.

Starting with National Bellas Hess v. [Illinois] Department of Revenue in 1967, and continuing with Quill Corp. v. North Dakota in 1992, the US Supreme Court held that mail-order retailers with no physical presence in a state shouldn’t have to collect sales taxes from customers in that state.

The reasoning, from a 1946 Felix Frankfurter opinion that was cited in Bellas Hess (but itself had nothing to do with mail-order retailing), was that “state taxation falling on interstate commerce . . . can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.”

If a retailer had a store or even just a few employees in a state, it was deemed as enjoying the protection of the local government and thus obliged to collect sales taxes. If it didn’t, it wasn’t. Today, as you’ve probably heard, the Supreme Court changed its mind. Wrote Justice Anthony Kennedy in his majority opinion:

“Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill.”

Makes sense. And Chief Justice John Roberts, in his dissent, agreed that Bellas Hess was “wrongly decided” in 1967, and that the internet has changed lots of things since then. But then he wrote:

“Ecommerce 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.”

Members of Congress have been trying. The Marketplace Fairness Act, first introduced in 2013; the Remote Transactions Parity Act, first introduced in 2015; and the Online Sales Tax Simplification Act, which as best I can tell was never formally introduced but got some attention in 2015 and 2016, all aimed to allow states to collect sales taxes from online retailers.

Another bill, the No Regulation Without Representation Act, introduced in 2017, would have kept the sale tax exemption in place. But . . . none of them came close to passing.

So now the Supreme Court has done Congress’ job for it. This brought to mind a conversation I had last week with Paul Tucker, the former deputy governor of the Bank of England who studied how policy is made in the US for a new book and came away convinced that this country’s reliance on the courts is out of hand.

In a democratic system, he argued, it’s Congress that should be making policy and keeping watch over the appointed technocrats who do — not the courts.

— Bloomberg/The Washington Post Service

Published in Dawn, The Business and Finance Weekly, June 25th, 2018