A Requiem for the Physical Presence Rule: Deconstructing and Refuting South Dakota v. Wayfair, Inc.

V. South Dakota v. Wayfair, Inc.

A. Echoes of Heitkamp v. Quill

The only person happier than state officials with the result in Wayfair may have been Justice Gerald W. VandeWalle, who at 89 years old, is the oldest and longest sitting Justice on the North Dakota Supreme Court. In 1991, Justice VandeWalle wrote for a unanimous North Dakota Supreme Court in Heitkamp v. Quill Corp., the case giving rise to Quill v. North Dakota, which (it has to be said, somewhat brazenly) announced the demise of Bellas Hess’s physical presence rule, only to have the ruling overturned 8–1 by the Supreme Court. Yet, Wayfair delivered vindication to Justice VandeWalle and marked him as perhaps the only member of an exclusive club of state supreme court justices who have lived long enough to see a decision they authored reversed by the U.S. Supreme Court and subsequently effectively reinstated decades later.

It is not overstating the point to say that Justice Kennedy’s opinion in Wayfair, though novel in some respects, repeated many of the same arguments that Justice VandeWalle made in his opinion in 1991. Indeed, it is difficult to determine whether various passages from each opinion appeared in Wayfair in 2018 or Heitkamp v. Quill in 1991.

From his position on a state supreme court in 1991, Justice VandeWalde was obliged, in order to justify effectively ignoring Supreme Court precedent, to build an argument of implied overruling. His raw material was over a decade’s worth of Commerce Clause jurisprudence, beginning with Complete Auto Transit, Inc. v. Brady, the 1977 Supreme Court decision that indeed reformulated the Commerce Clause analysis in the context of state taxation. There, as noted above, the Court espoused a four-pronged test for measuring whether a state tax is permissible under the Commerce Clause, including a requirement that the tax be “applied to an activity with a substantial nexus with the taxing State.” But Complete Auto in no way explicitly overruled Bellas Hess’s physical presence rule. This left Justice VandeWalle to infer from rulings subsequent to Complete Auto that it was the Court’s unstated intent to nevertheless overrule Bellas Hess.

For example, in National Geographic Society v. California Board of Equalization, it was of upmost significance to Justice VandeWalle that the Court focused on the out-of-state seller’s relationship to the state rather than the out-of-state seller’s activities in the state. For him, this allowed the court to “expand[] the concept of nexus” and suggest that a “lesser showing of nexus may suffice in such cases.” This, notwithstanding the fact that National Geographic had two offices and employees in California.

As additional evidence of the Court’s implied abandonment of the physical presence rule, Justice VandeWalle highlighted that in D.H. Holmes Co. v. McNamara, where the retailer in question was an in-state retailer with 13 stores and 5,000 employees, the Court’s initial focus was not the retailer’s physical presence in the State but rather the retailer’s “significant economic presence in Louisiana.” For Justice VandeWalle, this sent a signal that the Court’s post-Complete Auto-analysis would key off of economic presence, even in the case of extensive physical presence.

Justice VandeWalle went on to cite other cases that were less on point, but, for him, still relevant to the question of Bellas Hess’s survival. He also commingled the question of due process (for which he could hardly be blamed since Bellas Hess did the same thing) to eventually conclude that in light of the “wholesale changes in the social, economic, commercial, and legal arenas,” the North Dakota Supreme Court was “required to apply Bellas Hess in a contemporary context as we believe the Supreme Court would apply that decision.” It would be difficult to find a bolder statement of jurisprudential self-licensure: a state court assuming the mantel of the Supreme Court and speculating how it might rule if, it too, decided to ignore precedent.

Justice VandeWalle proceeded to develop a Commerce Clause for the ‘90s, at least in the context of interstate mail order transactions. His fundamental point in 1991 was substantially similar to Justice Kennedy’s in 2018: with all the advancements in technology since 1967, out-of-state retailers could no longer complain of a use tax collection duty. “[The] basis for [the physical presence rule] has also been seriously eroded by the technological advances of the past quarter-century. The almost universal usage of automated accounting systems, and corresponding advancements in computer technology, have greatly alleviated the administrative burdens created by such a collection duty.” Though, as with Justice Kennedy in Wayfair, discussed below, Justice VandeWalle was long on the rhetoric but short on the details.

Justice VandeWalle and Justice Kennedy alike seem to have fallen prey to the logical fallacy that if certain people can do something momentous, even though once perceived as impossible, then it only stands to reason that others should be able to do something perceived as less difficult, though entirely unrelated. This fallacious reasoning has been described as “Appeal to the Moon.” Using the argument that “If we can put a man on the moon, we can [insert seemingly much easier thing to accomplish here].”

Justice VandeWalle’s broad inference that advancements in technology generally could only mean advancements in technology with respect to use tax collection lent itself to the notion that the Supreme Court not only recognized technological advancement but also accepted the proposition that it “may require corresponding changes in legal doctrine.” This, combined with the perceived fundamental shift in Commerce Clause analysis post-Complete Auto, allowed Justice VandeWalle to conclude that it was his court’s responsibility to “rethink” previous legal doctrines “to account for societal changes” and “the vast technological explosion of recent years.” On this basis, Justice VandeWalle endorsed and applied a new standard of nexus: that a company’s “significant economic presence” in North Dakota generated a “constitutionally sufficient nexus to justify imposition of the purely administrative duty of collecting and remitting the use tax.”

B. The Lead-up to Wayfair

Justice Kennedy effectively revived Justice VandeWalle’s reasoning 23 years later in his concurring opinion in Direct Marketing with a call to the legal system to “find an appropriate case for this Court to reexamine Quill and Bellas Hess.” The pronouncement went off like a starting gun. Lawmakers and tax officials in several states (probably euphorically) went to work. Alabama was early out of the gates. By regulatory means—a convenient approach as it did not require waiting until the state legislative session convened—Alabama issued an administrative rule reframing the obligations of out-of-state retailers making “significant sales into Alabama.” Perhaps because it was first into the pool of Quill-busting laws, Alabama state tax officials eased in with some timidity. The new regulation imposed use tax collection responsibility on out-of-state retailers with more than $250,000 of sales to Alabama residents in the previous year—this was bold (as it was facially unconstitutional) in the “substantial nexus” reframing, but fairly measured as a first attempt to create a threshold for economic presence.

South Dakota was next in line but perceived the benefit in legislatively responding to Justice Kennedy’s request. Its economic nexus statute was alternatively transactional and monetary: if an out-of-state retailer engaged in more than 200 transactions with, or tallied more than $100,000 gross receipts from, South Dakota residents, a use tax collection obligation would follow.

The law was clearly unconstitutional under Quill and litigating its merits through the usual tax assessment and appeal process (with fact gathering and administrative appeals) would seriously delay the law’s true purpose. So, South Dakota state legislators thought tactically; this law was destined for the U.S. Supreme Court (invited by one of its Justices, no less), and the substantive opinions of state court judges along the way would be unwelcome detours. Thus, in order to fast track the law through the South Dakota state judicial system, the South Dakota legislature adopted special statutory provisions to preempt drawn out litigation. For example, the legislation granted the State tax authority to bring a declaratory judgment action against “any person the state believes meets the criteria” under the statute. Unfortunately, for the state, in February 2017, the largest online retailer of merchandise, Amazon, began collecting South Dakota use tax, less than a year after South Dakota’s governor signed the economic nexus law. In 2017, Walmart.com was the next largest national online retailer, but due to its physical presence in the state, it was already collecting use tax in South Dakota. So, the State went after the next tier of online retailers not collecting use tax: Wayfair, Overstock, and Newegg.

The South Dakota economic nexus law also lubricated potential friction points in the courts by directing any South Dakota trial court, before which the matter might come, to “act as expeditiously as possible” and to “proceed with priority over any other action presenting the same question in any other venue.” Procedurally, South Dakota’s legislature statutorily directed the state trial courts to assume that the “matter may be fully resolved through a motion to dismiss or a motion for summary judgment,” rather than get bogged down in potential factual disputes. The South Dakota legislature’s true purpose could only have been more obvious if they filed the motion on behalf of the litigants. Finally, as a jurisdictional matter, always with focus on accelerating the process, the statute granted exclusive appellate jurisdiction to the South Dakota Supreme Court and directed the court to hear the appeal as expeditiously as possible.

All of these features combined to allow the State of South Dakota to file a petition for writ of certiorari from the state supreme court’s decision that the South Dakota statute was unconstitutional on October 2, 2017, a mere 18 months after the governor signed the bill into law—a dizzyingly fast pace relative to the life of a typical state tax controversy timeline. The Supreme Court granted the State’s petition on January 12, 2018.

C. The Majority Opinion

1. The Issue Statement

Justice Kennedy’s opinion begins with a framing of the issue: whether an out-of-state online retailer “can be required to collect and remit” a state’s sales and use tax. As a matter of law, he asserts that the question “turns on proper interpretation of the Commerce Clause.” This statement, as it relates to the case at hand is technically correct, but it fails to recognize the big picture interplay between the Due Process Clause and the Commerce Clause.

As noted above, Bellas Hess dealt with the questions of due process and Commerce Clause viability concurrently, without clearly articulating which doctrine compelled the onset of the physical presence rule. Quill separated the two clauses and clarified that the driving force behind physical presence was the Commerce Clause. At the same time, it further noted that the two clauses are analytically distinct and differ fundamentally in several ways. On this foundation, the Quill court engaged in substantive and separate due process analysis, reiterating application of the due process touchstones of “some definite link, some minimum connection between a state and the person, property, or transaction it seeks to tax” creating “fair warning” that an out-of-state actor’s activity “may subject [it] to the jurisdiction of a foreign sovereign.”

In Quill, the out-of-state retailer had 3,000 customers in North Dakota, combining to yield gross receipts of over $1,000,000. This magnitude of contacts was “more than sufficient for due process purposes.” Thus, Quill focused the question of due process through the lens of minimum contacts and found the requirements satisfied. Similarly, in Wayfair, Wayfair, Overstock, and Newegg, given their status as massive online retailers, surely had customers and gross receipts of sufficient magnitude for due process to be easily satisfied in all sales-and-use-tax-imposing states. But it would be short-sighted folly to suggest the same result must apply to all online retailers. Moreover, it would misread Quill (and Wayfair) to suggest that the Commerce Clause subsumes the Due Process Clause (if the former is met, so must be the latter).

In reality, accepting the way that Justice Kennedy framed the issue at face value, Wayfair only addresses the Commerce Clause aspects of interstate use tax collection obligations. Quill’s due process analysis was not at issue in Wayfair and must survive as good law—perhaps not relevant for the likes of Wayfair, but surely meaningful for the small online retailer.

2. The Facts and Rebuttal

Justice Kennedy’s recitation of the facts bears an editorial feel and glosses over the absence of any meaningful record from the lower courts (which granted summary judgment on a barebones record to fast track the case through the state system). The South Dakota economic nexus law and the associated facts and circumstances surrounding it are Justice Kennedy’s case-in-point for the broader question related to the physical presence rule’s defects. He notes that the physical presence rule collectively causes the States to lose between $8 and $33 billion every year. (That is quite a range!) He also highlights the severity of South Dakota’s plight because of its substantial reliance on the state sales and use tax “for the revenue necessary to fund essential services” since it has no state income tax.

Later in the opinion, Justice Kennedy casts the sales and use tax as nothing more than an example of the “[S]tates’ reasonable choices in enacting their tax systems.” Moreover, he condemns Quill for infringing on “a tax many states for many years have considered an indispensable source for raising revenue” and enabling online customers “to escape payment of sales taxes—taxes that are essential to create and secure” active markets with goods and services.

It is worth taking a moment to think carefully about these statements. Justice Kennedy asserts that the Supreme Court’s interpretation of the Constitution’s Commerce Clause in Quill causes the States to lose billions per year in uncollected use tax revenues. “Assuming blame for the states’ revenue shortfall, based on the Supreme Court’s interpretation of the Constitution, casts the States as innocent victims —a status they do not deserve. Their role in revenue shortfalls, due to the advent of the online marketplace, is largely self-inflicted. After all, unlike the chicken and the egg causality dilemma, it is very clear which came first, the Constitution or the sales and use tax.

Before the Great Depression, state and local governments generally relied on property taxes for revenues. During the Great Depression, property tax revenue streams dried up as property tax assessments fell. Most states turned to a consumption tax—the sales tax and a companion use tax—as a stopgap, a mode of white-knuckled government survival in response to growing demands for public assistance. The sales tax’s charms, however, were beguiling. By 1947, the sales and use tax was the largest single source of state tax revenue.

The sales tax turned out to be a state lawmaker’s dream. Its collection was completely outsourced to third parties, who could be held liable themselves if they failed to properly collect. The tax’s incidence on the populace was death by a thousand cuts, with taxpayer awareness of actually paying the tax descending almost to the subconscious.

Consumer unawareness of the sales tax was proved almost conclusively when three leading economists, Raj Chetty, Adam Looney, and Kory Kroft, ran an experiment to measure consumer behavior in reaction to the sales tax. They posted tags showing the sales tax-inclusive price below the original pretax price tags in a grocery store. They then surveyed customers and asked them to estimate the total price of a basket of goods to measure their awareness of the sales tax when not included in the posted price. They found that without the tax-inclusive tags “nearly all survey respondents ignored taxes when calculating the total price of a basket of goods, whereas with the tags, the vast majority computed the total tax-inclusive price correctly.” This finding allowed them to conclude that consumers underreact to taxes that are not included in the posted price.

The Chetty/Looney/Croft study considered the salience of the sales tax. Salience is a heuristic that measures awareness in decision making—in this case, awareness of the sales tax’s incidence in purchasing decisions. Salience can be measured through an economic lens or a political lens. Economic salience “refers to how tax presentation affects market decisions and economic activity.” “Political salience refers to how tax presentation affects voting behavior and political outcomes.”

The sales tax has remarkably low economic and political salience. This is a concern if, as a matter of tax policy, taxpayers should be aware of their tax incidence such that they properly account for them in their economic and political decisions. And yet, a robust line in the tax literature considers the merits of hidden taxes and considers them a viable legislative stratagem for wealth redistribution. That argument, however, butts up against timeworn guiding principles of tax policy; principally that a tax should be transparent and visible. As a general rule, “[T]axpayers should know that a tax exists, and how and when it is imposed on them and others. Taxpayers should be able to easily determine the true cost of transactions and when a tax is being assessed or paid, and on whom.”

The sales and use tax fails in almost all respects when measured against this standard of transparency and visibility. Yet, state lawmakers made an affirmative choice to dismiss saliency in favor of the sales tax’s steady and strong revenues, even in the face of economic uncertainty or downturns. That legislative choice, however, was a deal with the devil, bound up in reliance on third parties, who over time may or may not be within a given state’s jurisdictional reach. Moreover, blatant disregard for a guiding principle of tax design should influence the amount of sympathy accorded to states when the tax becomes imperiled because of its low-salience character. Chetty, Looney, and Kroft’s findings suggest that consumers almost completely ignore the sales tax when making buying decisions. Moreover, as taxpayers ignore how much sales tax they pay on a transaction-by-transaction basis, they are even less aware of its annual incidence. It borders on petulance for states to be surprised and complain when their residents fail to notice the absence of a low-salience tax (e.g., in connection with an online transaction) and fail to self-report it when the low-salience feature of the tax was exactly the reason for its legislative popularity.

The plight of the States, as framed by Justice Kennedy, further wains when considering the way the sales tax plays off of human cognitive weakness. Brian Galle defines a hidden tax as “a tax design, in which the behavioral effects of the tax are less than predicted by classic economic theory.” Chetty, Looney, and Kroft’s conclusion that individuals underreact to the sales tax illustrates this. Economic theory suggests that rational actors in the marketplace will consider the sales tax in their consumer decisions; that before buying a product, they will take in information relevant to their decision, including tax information. Amos Tversky and Daniel Kahneman have shown, however, that human beings are not the rational actors—what they call “Econs”—that economic theory presumes. Rather, humans tend to be irrational actors, especially when called upon to gain information beyond their immediate and current cognitive perception. It will take work to calculate the sales tax before making a buying decision (though perhaps somewhat less now given that most smartphones come equipped with a calculator and access to the Internet to look up sales tax rates), yet the human brain’s cognitive tendency is away from making that effort. That tendency is reinforced millions of times each day as taxpayers en masse make purchases and give no thought to the sales tax’s incidence. Thus, the low economic salience of the sales tax exploits human cognitive bias and relies on the behavioral tendency to avoid slower and analytical thinking.

The sales tax’s low economic salience, to some extent, engenders low political salience: after all, how can voters hold a politician politically accountable for a decision related to a tax whose incidence they ignore? This allows state legislators latitude to adjust rates without anywhere close to the political repercussion that would follow, for example, a very politically salient increase in the income tax rates. Is it any wonder that the sales tax took a permanent seat at the table of state and local public finance? When compared with the salient individual income tax, and the even more salient property tax, the other primary sources of state and local tax revenues, state legislators couldn’t help themselves.

From a state lawmaker’s perspective, the sales tax’s only downfall was its complement: the use tax. When consumers make purchases from outside their state of residence, and no sales tax is collected, they are required to remit use tax to their home state. Not only does the use tax have a dramatically high rate of noncompliance on an individual level, but most taxpayers, at least anecdotally, are largely unaware that it exists. In early days, the two decades following the Great Depression, use tax noncompliance was ostensibly a minor problem as the resulting revenue losses were likely small with consumers carrying on most of their business locally or at most, intrastate. The advent of mail order catalogs and the associated uptick in interstate commerce, however, almost certainly disrupted the states’ anticipated streams of sales tax revenue and use tax noncompliance was more keenly felt. Reactively, with aggressive upswing, states started to reach beyond their borders to compel out-of-state mail order companies to collect use tax at the point of transaction. These efforts were stifled on constitutional grounds in Bellas Hess and Quill.

During the last two decades, the online marketplace has completely upended the system and left states clamoring for relief through either judicial or legislative intervention. But for the states to complain about this is a wonderful example of both eating cake and lamenting that there is none left. Many states have eaten their cake as they have enjoyed the many benefits of the sales tax, discussed above, for nearly a century. They overhauled their systems of public finance, hitching their proverbial wagons to the sales tax with full awareness of the unenforceability of the use tax on an individual level. This reliance was built upon a tax with outsourced third-party collection responsibility.

Are the states completely absolved of responsibility for failure to have enough foresight to see that someday, their third-party collection agents may not be within their jurisdictional reach? Are the states exculpated for creating a tax that is unenforceable without those third-party collectors? Why does the Constitution give way for indirect remote use tax collection through out-of-state retailers without requiring states do more to create public awareness of use tax in their own state or even attempt to collect it in good faith? Why does South Dakota, in particular, enjoy Justice Kennedy’s highest sympathy for choosing to rely so heavily on the sales and use tax to fund state coffers to the complete exclusion of any personal income tax?

These questions are particularly poignant in light of information discovered and reported by news outlets in October 2021. The Pandora Papers, a “trove of more than 11.9 million confidential documents” shared with news organizations, revealed South Dakota’s role as an “offshore financial center.” In addition to being a tax haven for “foreign wealth, including that derived from international drug smuggling and exploitative labor practices,” the Pandora Papers revealed that South Dakota allows “[h]igh-net worth Americans” to shift “billions to South Dakota . . . , shortchanging federal and home state tax collectors in the process.” Highlighted, in particular, was South Dakota’s allowance for perpetual “dynasty trusts” which “induced many of the richest American families to locate their trusts in South Dakota.” Dynasty trusts allow wealth to transfer from one generation to another and “escape estate tax indefinitely.”

These points are significant in at least two ways which are related to the current discussion. One, they undermine Justice Kennedy’s narrative of state victimhood, and more precisely South Dakota as an object of sympathy. Should the Supreme Court be so worried about South Dakota’s economic viability related to its reliance on the sales and use tax when it is involved in and enabling nefarious conduct such as that described in the Pandora Papers report? Second, by implication, the circumstances of South Dakota’s public finance crisis may not have been as dire as Justice Kennedy perceived if the State can promulgate policy and forego tax revenues in connection with the dynasty trusts described in the report. Or, perhaps worse, they were as severe as Justice Kennedy perceived, but Wayfair provided the lifeline necessary to continue South Dakota’s dynasty trust rules.

Overall, if states perceive a sales and use tax compliance gap and are unwilling to deploy resources to fix it, is it not incumbent upon the states to look for other ways to collect revenue? Is there something apart from political inopportunity that prevents South Dakota’s legislature from creating a personal income tax?

All this is to suggest that Justice Kennedy’s claim that Quill imposes “serious inequity” on the states ignores historical and political realities. In truth, the Supreme Court’s interpretation of the dormant Commerce Clause has not caused states to lose any revenues. Any serious inequity endured by the states has been self-inflicted through unreasonable reliance on a tax that they cannot enforce without third parties, which exploits the cognitive biases of their own residents, and on which state legislators have become insatiably dependent.

3. The Physical Presence Rule

In Wayfair, Justice Kennedy found the physical presence rule “flawed on its own terms,” and an “incorrect interpretation of the Commerce Clause.” He supports this conclusion on three separate grounds: (1) the physical presence rule “is not a necessary interpretation” of the Complete Auto test which requires that a state tax must be “applied to an activity with a substantial nexus with the taxing State;” (2) the physical presence rule “creates rather than resolves market distortions;” and (3) the physical presence rule “imposes an arbitrary, formalistic distinction” that modern Commerce Clause precedents “disavow.” The following discussion addresses each of these arguments in turn.

a. Not a Necessary Interpretation: Changing the Standard of Review. Justice Kennedy begins his Commerce Clause analysis on the premise that the “Due Process and Commerce Clause standards may not be identical or coterminous, but there are significant parallels.” As noted above, Quill is not only significant for reaffirming a bright-line rule in the form of the physical presence rule; it also clarified that the Commerce Clause and Due Process Clause, while closely related, “pose distinct limits on the taxing powers of the States.” The Court in Quill noted further that the “Due Process Clause and the Commerce Clause are analytically distinct.” Justice Kennedy’s beginning premise seems apt to walk back these clarifying statements to a less precise distinction between the two—perhaps approaching a reversion to Bellas Hess.

Kennedy’s attempt to analytically coalesce but not commingle the two doctrines was tactically important to his argument because it allowed him to leverage Quill’s conclusion that due process may be satisfied “irrespective of a corporation’s lack of physical presence in the taxing State,” but the maneuver was lacking in well-reasoned support. Without detailed explanation, Justice Kennedy blithely concluded that “[t]he reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for an out-of-state seller’s liability to remit sales taxes.”

This is a curious assertion given that the due process reasoning in Quill keyed off of due process touchstones of fair warning, purposeful availment, and minimum contacts. The Quill Court recited that “the relevant inquiry under [due process minimum contacts] is whether ‘the state has provided some protection, opportunities, or benefit for which it can expect a return.’” It went on: when a corporation purposefully avails itself of a state’s economic market, it clearly has “fair warning that its activity may subject [it] to the jurisdiction of the foreign sovereign.” Thus, whether in the context of personal jurisdiction or a state’s imposition of a duty to collect use tax, when an out-of-state party purposefully avails itself of the laws and protections of a state, it should expect judicial and tax jurisdiction under the Due Process Clause to follow. For the out-of-state retailer in Quill, purposeful availment was measured by the magnitude of the contacts with North Dakota: from a “deluge of catalogs” sprang over $1,000,000 in sales from about 3,000 customers—a magnitude of contacts “more than sufficient for due process purposes.”

But how, as Justice Kennedy asserts, do these reasons for due process validity parallel the relevant analysis under the dormant Commerce Clause? Complete Auto’s four-part test concerns itself with questions of burdens on, and discrimination against, interstate commerce. Quill applied those tests in 1992 and Wayfair did in 2018. Both cases focused on the first of the tests: whether “the tax is applied to an activity with a substantial nexus with the taxing State.” It is unclear, and Justice Kennedy does not identify or elaborate how the due process rationale applied in Quill supports his Commerce Clause analysis in Wayfair.

It seems the true distinction between Quill and Wayfair is the framing of the standard of review for the physical presence rule. Quill upheld Bellas Hess’s physical presence rule because it was “not inconsistent with Complete Auto.” Wayfair overruled the physical presence rule because, at least in part, it was “not a necessary interpretation of” Complete Auto’s substantial nexus test. Which of these standards is more consistent with principles of stare decisis relative to the initial holding in Bellas Hess? Which of these standards suggests an appropriate level of judicial restraint?

Quill reviewed Bellas Hess’s 1967 physical presence rule to determine whether its findings were consistent with subsequently developed law related to the Commerce Clause in Complete Auto in 1977. In other words, intervening developments in the law triggered review. Quill balanced the strengths and weaknesses of a bright-line rule but made no representation that physical presence was a perfect standard for measuring substantial nexus. It readily acknowledged the physical presence rule’s artificiality “at its edges” but considered that weakness “more than offset by the benefits of a clear rule.”

Wayfair reviewed Quill’s physical presence rule without any intervening changes in the law—Complete Auto was and still is the standard. Without a change in the law, Justice Kennedy moved the goalposts and changed the standard of review: the physical presence rule would be upheld only if it was a “necessary interpretation” of the Commerce Clause.

In no other case has the Supreme Court adopted a “not a necessary interpretation” standard of review. It seems cut out of whole cloth to suit Justice Kennedy’s ends-driven analysis. Moreover, in a common law system where precedent carries the weight of law, the standard seems particularly out of place. Implied is that precedent will be upheld only if it can clear the high bar of being a necessary interpretation of the Constitution. This is a different and a substantially more onerous standard of review than “validity,” “reasonableness,” or “soundness.” Moreover, it empowers the current Court to the detriment of prior courts such that precedent may be ignored or overturned if is not a necessary interpretation of the Constitution.

The substantive contention that the physical presence rule was not a necessary interpretation of the substantial nexus test under Complete Auto was not news and did not meaningfully enhance Justice Kennedy’s argument. Quill acknowledged the physical presence rule’s shortcomings and did not suggest that the physical presence rule necessarily followed from the substantial nexus test of Complete Auto. Rather, Quill, with appropriate deference to stare decisis, left a beacon in the “quagmire” of dormant Commerce Clause jurisprudence to provide a clear definition of substantial nexus. It did so with full acknowledgement that the physical presence rule was not ideal (or a necessary interpretation of the Commerce Clause), but Congress was better qualified and constitutionally empowered to resolve the matter. Quill, in and of itself, is tantamount to an invitation to Congress to intervene and resolve.

If Justice Kennedy’s “not a necessary interpretation” standard is taken to its logical conclusion, he should have concluded the opinion there and overruled the whole of the Court’s line of dormant Commerce Clause decisions. After all, in the dormant Commerce Clause, the Supreme Court is dealing with implied power that, according to one current member of the Court, Justice Clarence Thomas, does not exist. The Commerce Clause is an affirmative grant of power to Congress under Article I to regulate interstate commerce. On the purported negative sweep of the Commerce Clause, the Supreme Court has taken it upon itself to adjudicate state laws that affect interstate commerce in areas where Congress has not affirmatively regulated. Congress may undo, amend, or uphold anything the Court decides under the dormant Commerce Clause. Given that the Supreme Court is borrowing power from Congress up to and until Congress decides to exercise it, are any of its interpretations a “necessary interpretation” of the Commerce Clause?

Justice Kennedy concludes his “not a necessary interpretation” argument with the first of several “appeals to the moon.” Surely, “the administrative costs of compliance, especially in the modern economy with its Internet technology, are largely unrelated to whether a company happens to have a physical presence in a State.” Exactly how the “Internet technology” is supposed to ease the costs of compliance Justice Kennedy does not say.

b. Market Distortions. Justice Kennedy frames the physical presence rule as an antiquated doctrine that, “each year . . . becomes further removed from economic reality,” suggesting a trajectory away from compliance, rather than a regression back towards it. Unfortunately, Justice Kennedy’s forecast more appropriately fit conditions in early 2015, when he wrote his concurring opinion in Direct Marketing, rather than in July 2018 when the Wayfair decision was handed down. In the interim, significant developments took place in the context of use tax collection in e-commerce. Amazon, the online marketplace vendor hogging the most shade under the physical presence rule’s so-called “tax shelter,” began collecting use tax in all states with a sales tax on April 1, 2017. Up to that point, Amazon had been strategically entering into agreements with states to collect their use tax, usually with special concessions, but it abandoned that approach in 2017 and started collecting everywhere.

Amazon’s shift to collect sales and use tax in all states had nothing to do with an awakening towards dutiful corporate citizenship or any sort of sympathy for the states—it was strategic and market driven. At the time, Amazon Prime, Amazon’s paid subscription service, was in the process of rolling out its same-day delivery service. Such a herculean task as that required “fulfillment centers” or warehouses around the country. It also would require Amazon to deploy its own delivery drivers and a massive fleet of delivery trucks. All this is to say that Amazon started collecting use tax on purchases in 2017 because its business strategy would eventually create physical presence in every state. Thus, market forces compelled Amazon towards voluntarily collecting use tax.

Justice Kennedy ignores this critical fact in his opinion, but it was not lost on Chief Justice John Roberts, who notes as much in his dissenting opinion and suggests that if the “online behemoth Amazon” made such a shift, then “[to] the extent the physical-presence rule is harming States, the harm is apparently receding with time.” The term “behemoth” here is one of the few characterizations that approaches a fair description of Amazon relative to other exclusively online retailers. Amazon is the largest e-commerce retailer in the world, and, by some margin, it is the largest e-commerce retailer in the United States. In 2018, when Wayfair was handed down, Amazon’s gross sales were $232 billion. In 2020, its gross U.S. sales exceeded $386 billion. To put the 2020 number in perspective and highlight the magnitude of disparity, the combined gross sales of the remaining top-10 e-commerce retailers in the aggregate is $241 billion, more than $100 billion less than Amazon’s gross sales alone. By way of comparison in 2018, Wayfair’s gross sales revenue was $6.78 billion. Newegg’s gross sales were $2.022 billion. Overstock’s revenues were $1.822 billion. The human mind does not easily comprehend such large numbers, but visualization is helpful. For example, there are about 331 million people in the United States. Taking Amazon’s gross sales for 2018 of $232 billion over the 331 million U.S. population, it amounts to about $700 of sales per person. Run the same calculation for Wayfair, Newegg, and Overstock, and the numbers rounded to the nearest dollar are $20, $6, and $6, respectively, per person.

This is all to suggest that if the sales and use tax collection crisis were a war between online retailers and the states, and Justice Kennedy the cavalry, by the time he arrived on the scene, the war was effectively over. Amazon, by far the largest of the enemy’s ranks, had defected and was on the side of the states, dutifully compliant. Other online retailers were still engaged in skirmishes, but surely even the states knew that when Amazon conceded, their coffers would be substantially replenished, and victory could be declared.

If the largest of the online retailers had already shifted to voluntarily collecting use tax, is it too much to suggest that the “market distortions” Justice Kennedy uses to justify overruling Quill may have already been on their way towards market resolution? Justice Kennedy fails to account for contemporaneous circumstances. Had he considered Amazon’s affirmative collection compliance, the physical presence rule could have emerged as a meaningful protection for small online retailers as market forces may have compelled the other large online retailers to follow Amazon’s path in order to compete for market share. After all, Amazon sells furniture and competes directly with Wayfair and Overstock. Amazon sells electronics and related devices and competes directly with Newegg. At some point those three retailers (and the myriad of others that compete with Amazon) would have had to react to the market and come up with a way to deliver products in the way that competes with Amazon Prime.

c. Arbitrary Outcomes. Justice Kennedy’s final point with respect to Quill’s flaws and ripeness for being overruled revisits Quill’s determination that a bright-line test, its shortcomings notwithstanding, was on balance a useful tool for “demarcation of a discrete realm of commercial activity that is free from interstate taxation.” For Justice Kennedy, Commerce Clause questions must “eschew” formal bright-line rules in favor of “case-by-case analysis of purposes and effects.” Quill acknowledged that formalistic views were “renounced” in Complete Auto but held that formal distinctions between “taxes on the ‘privilege of doing business’ and all other taxes,” which serve no Commerce Clause purpose, were plainly different from a “formalistic” but “clear rule” that “firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use tax.”

Justice Kennedy’s argument, of course, is correct in its literal application: the physical presence rule “treats economically identical actors differently” largely because of its formalistic approach. He provides a hypothetical to this effect and argues that Quill’s distinction between a small online retailer that maintains inventory in South Dakota and a large online retailer with a sophisticated virtual showroom accessible in every state, with inventory on the Nebraska side of the South Dakota-Nebraska border, “simply makes no sense.”

This hypothetical reveals more than Justice Kennedy probably intended. Indeed, perhaps the small online retailer that maintains a few items of inventory stored in a warehouse in South Dakota begrudges the use tax collection obligation that the inventory’s physical presence creates in the State. Yet, that retailer made the decision to store goods in South Dakota with awareness that such action would carry with it a sales and use tax collection obligation. Pre-Wayfair, at least anecdotally, many retailers, online or otherwise, were aware of the physical presence rule and its salience allowed them to plan and understand the consequences of business decisions.

An interview with the hypothetical small online retailer post-Wayfair could be revealing. Without the physical presence bright-line rule and Justice Kennedy’s endorsement of a case-by-case analysis with South Dakota’s economic nexus statute acting as a guidepost, uncertainty abounds. States have not uniformly followed South Dakota’s statute. Though some have followed South Dakota’s 200 transactions or $100,000 in gross sales threshold, several have eliminated the transactions requirement and installed a sheer gross sales threshold. Moreover, the gross sales threshold is not consistent among the states. Many states use a $100,000 threshold, like South Dakota. In contrast, Alabama and Mississippi have set the operative gross sales amount at $250,000; California, New York, and Texas at $500,000. All sales and use tax-imposing states have promulgated their own Wayfair-inspired, yet inconsistent, laws.

It is now left to the small online retailer in South Dakota with inventory stored in Nebraska’s lot to manage each state’s unique laws related to use tax collection in the online marketplace. This is to say nothing of then, after determining in which states she is required to collect, discovering the rates for each of the municipalities in which her customers live and filing sales tax returns in each of those states (and any self-administered municipalities), along with remitting amounts due. In the end, the retailer will do what many tax practitioners have resignedly advised clients to do: simply collect use tax on all transactions, bypassing the threshold test, even though creating a compliance obligation that is onerous to bear for any small business, online or otherwise. Justice Kennedy intended the small online retailer in his hypothetical to be an object of sympathy on account of Quill’s physical presence rule. She is indeed an object of sympathy, but only since Wayfair was handed down.

4. Stare Decisis

a. Stare Decisis Giving Way. Justice Lewis Powell said, “[T]he elimination of constitutional stare decisis would represent an explicit endorsement of the ideal that the Constitution is nothing more than what five justices say it is.” Surely, this is not to say that all Supreme Court decisions are infallible and beyond reproach. Some of the Court’s decisions stand as historical relics and deserve their status as examples of the Court’s mistakes. Correction through overruling in those circumstances was only too appropriate. Yet Justice Powell’s admonition resonates. The Court’s credibility exists because its word is the law of the land. Stare decisis helps maintain that lofty status, instilling predictability in the law, with respect for and consistency with prior decisions.

Justice Louis Brandeis suggested that “[s]tare decisis is usually a wise policy, because in most matters it is more important that the applicable rule of law be settled than it be settled right.” He acknowledged, however, that the Court has “often overruled its prior decisions” “in cases involving the Federal Constitution, where correction through legislative action is practically impossible.” All this is to suggest that Justice Kennedy’s quest to overturn precedent standing for over fifty years was formidable. Whether he did so with sufficient persuasiveness to match the circumstances Justice Brandeis contemplated without nudging the Constitution towards “nothing more than what five justices say it is” deserves serious inquiry.

At the outset, Quill’s physical presence rule seems to be less than the ideal candidate for overruling. Justice Brandeis’s point that settled status in the law many times supersedes its correct application seems to be especially relevant in the context of sales and use tax collection in the online marketplace. All the shortcomings of the physical presence rule notwithstanding, it was a bright-line rule in an area of the law where little black-letter law exists. The rule allowed economic actors to make decisions with something approaching full understanding of their consequences. Wayfair substantially disrupted settled law to reach what Justice Kennedy and the majority perceived to be a correct application of the law. That application, however, as explored above, resolved much of what was already on its way to resolution in the market and left real questions about what the state of the law is moving forward.

Justice Brandeis’s comment that the case for revisiting constitutional questions is especially strong in cases where “correction through legislative action is practically impossible” seems particularly at odds with Justice Kennedy’s approach. Preeminent among cases in which correction by Congress is not only possible, but invited, are the Court’s dormant Commerce Clause cases. Quill urged Congress to correct the physical presence rule as it saw fit. Proposed federal legislation—with the Marketplace Fairness Act of 2013 striking closest to the target with passage in the Senate—had been frequently introduced but was curtailed when Justice Kennedy intervened with his concurring opinion in Direct Marketing. Taking Justice Brandeis’s admonition at face value, dormant Commerce Clause cases must fall near the bottom of the list of Supreme Court decisions that are ripe for judicial reconsideration, as legislative action is anything but impossible. All this considered, Quill, does not seem the model for Supreme Court precedent that should be overruled.

Undeterred, however, Justice Kennedy’s fundamental thesis for invalidating Quill and subverting stare decisis is two-pronged. First, stare decisis, though worthy of utmost caution, “is not an inexorable command;” and second, given that Bellas Hess and Quill represent “the Court’s prohibition of a valid exercise of the States’ sovereign power,” the physical presence rule could no longer persist.

The first prong does little more than suggest what is already implied in stare decisis and substantially confirmed in the Court’s history: in substantially all cases within a common law system, precedent creates law on which government and private actors alike rely and therefore deserves the highest deference. Implicitly within the framework of stare decisis are escape valves and room for permutation. Unfortunately, as a Congressional Research Service (CRS) report concluded based on a survey of Supreme Court decisions shortly after Wayfair was handed down, it is difficult to predict “when the Court will overrule a prior decision.” Even more confounding, “the Court has not provided an exhaustive list of the factors it uses to determine whether a decision should be overruled or how it weighs them.”

Undertaking a monumental task to distill the historical instances in which the Supreme Court has overruled its prior decisions, the CRS report identifies five “prudential and pragmatic” factors that the court balances against the “costs and benefits to society of reaffirming a prior holding”: (1) quality of reasoning, (2) workability, (3) inconsistency with related decisions, (4) changed understanding of relevant facts, and (5) reliance.

Justice Kennedy alludes to each of these factors to some degree throughout the opinion. He suggests the reasoning in Quill is “flawed on its own terms.” He cites scholars and practitioners to argue that Quill is “riddled with internal inconsistencies.” He dismisses reliance interests as unfounded as he measures Quill to no longer create “a clear or easily applicable standard.” Yet with all this, Justice Kennedy’s substantive analysis for bypassing stare decisis depends critically upon (1) a changed understanding of relevant facts precipitated by the advent of the Internet or “Cyber Age” and (2) the notion that Quill represented an intrusion on State sovereignty as it prohibited “a valid exercise of the States’ sovereign power.”

Taking the second of these two arguments first, Justice Kennedy’s reasoning seems circular and oversimplifying. As reason for ignoring precedent, he claims that the physical presence rule represents the Court’s “prohibition of a valid exercise of the States’ sovereign power.” The sovereign power referenced here seems to be the States’ tax authority generally, up to and including the States’ authority to impose a consumption tax in the form of a sales and use tax on its residents. To lump, however, within the bounds of “valid exercise of the States’ sovereign power” each relevant state’s desire to compel remote sellers to collect its sales and use tax in the online marketplace is conclusory. Flatly claiming that imposition of a sales and use tax collection duty on a remote seller fits neatly within the “valid exercise” of the States’ sovereign power to tax ignores the last seventy years of jurisprudential history on the matter. The physical presence rule did not impede any valid exercise of state power; it defined that power precisely (even if unsatisfactorily to the states) and set parameters around the very unclear jurisdictional authority of states to compel out-of-state actors to collect their use tax. To lump that question under the well-settled umbrella of whether states can impose a sales and use tax on their own residents or on transactions occurring within their own borders is analytically deficient.

As to the first point of changed understanding with respect to the relevant facts, Justice Kennedy quotes his own concurring opinion in Direct Marketing to reiterate the “far-reaching systemic and structural changes in the economy” and “many other societal dimensions caused by the Cyber Age.” Thus, the relevant changed fact that warrants disregard of stare decisis is the “Internet revolution,” which for Justice Kennedy made Quill’s error “more egregious and harmful.” Yet for all of Justice Kennedy’s churning over the “realities of the interstate marketplace,” with the proliferation of Internet access to Americans and Amazon’s usurpation of Walmart as the top retailer in the world, he ignores, as explored above, the most recent and relevant of changed facts: when Wayfair was handed down, Amazon had already begun collecting use tax. So, as Justice Kennedy laments the states’ revenue shortfalls precipitated by the Internet revolution, he makes no mention of how Amazon’s collection of use tax will ameliorate those shortfalls.

Extending the workability rationale from a different perspective, Justice Kennedy notes that the physical presence rule is unworkable in the online marketplace as states have struggled to determine whether the likes of apps on phones and cookies in browsers constitute physical presence. He argues that these nuanced and difficult questions will “embroil courts in technical and arbitrary disputes about what counts as physical presence.” This logic seems to stretch the notion of unworkable to beyond reason. To be sure, state responses to the physical presence rule have been the subject of controversy, but if the Supreme Court ignored precedent for every decision that did not spell out all the permutations and implications of a specific holding, stare decisis would be meaningless and could be disregarded in any circumstance where future litigation seemed likely.

Furthermore, there is no small irony here in Justice Kennedy’s claim that the physical presence rule was unworkable for the courts, when Wayfair has left the question of the extent to which a state can reach an out-of-state retailer murkier than ever. The South Dakota statute is the implied template for economic nexus, but states have varied in their conformity to it without clear guidance from the Supreme Court with respect to what elements of the statute are constitutionally required. As partially explored above, those elements can be broken into two elements: (1) the threshold tests and (2) membership in the SSUTA.

All states with a sales and use tax have now adopted some form of Wayfair-type legislation, yet only a minority of those states can claim full conformity to the South Dakota economic nexus law, with identical thresholds and membership in the SSUTA. Most states have strayed from or altered the threshold tests and are not members of the SSUTA. Justice Kennedy cited both the thresholds and South Dakota’s membership in the SSUTA as aspects of the South Dakota law that would provide small merchants “a reasonable degree of protection.” Unfortunately, Justice Kennedy stopped short of declaring those elements constitutionally required. The fallout is that states have substantially ignored those key elements of protection, leaving the small online merchant in the lurch. In all, the unworkability of Wayfair will likely exceed by leaps and bounds the physical presence rule’s unworkability. The issue of what is a constitutionally valid economic nexus law will, in all probability, bounce among the state courts for years to come and will likely require the Supreme Court to eventually clarify the law due to Wayfair’s unworkability.

Justice Kennedy must have realized that the strongest argument for retaining Quill as matter of precedent was the substantial reliance interests involved. Rather than confront the issue head-on, however, he leveraged the workability argument into a work-around. On the unworkability rationale and the question of whether apps on residents’ cell phones and cookies in browsers create physical presence, Justice Kennedy declared the physical presence rule unworkable. This unworkability—now measured by Justice Kennedy’s conclusion that the physical presence rule was “no longer a clear or easily applicable standard”—allowed Justice Kennedy to announce that any arguments based on reliance are “misplaced.” Thus, apparently, the entire online marketplace in the United States—and the commercial actors giving rise to over $468 billion in revenue in 2018 when Wayfair was decided—should have been able to anticipate that five out of nine Supreme Court Justices would vote to overrule 50 years of precedent on the grounds that the physical presence rule was “no longer a clear or easily applicable standard.” It might be difficult to find such a concise statement that so thoroughly undermines the Court’s credibility.

b. Stare Decisis and Justice Personnel Changes. In his concurrence in Quill, Justice Scalia warned against visiting “economic hardship upon those who took us at our word.” He went on, “[i]t is strangely incompatible . . . to demand that private parties anticipate our overrulings.” For Justice Scalia “reliance upon a square, unabandoned holding of the Supreme Court is always justifiable reliance . . . .” In many ways, this comes back to Justice Brandeis’s argument in favor stare decisis as a protection for the Constitution. Arguably, Wayfair nudged the Constitution closer to being “nothing more than what five justices say it is.”

To the point of continuity along the Court’s lines of opinions, Justice Scalia’s concurring opinion in Quill provides an opportunity for academic conjecture. It is a sneak-peak into an alternative universe in which Justice Scalia did not pass away. Given Justice Scalia’s adamancy in Quill, and his reputation for inflexibility, it is reasonable to assume that his concurring opinion represents how he would have voted in Wayfair.

At the outset, it is noteworthy that Justice Scalia was implicitly unconcerned about the plight of States. That the primary channel of commerce in the Wayfair-era had switched from mail order to e-commerce would have likely been a non-issue for him. He, moreover, mentions nothing about the prospect that at some point, technology would surely ease whatever burdens on interstate commerce physical presence was meant to prevent. In a nutshell, his concurring opinion in Quill conveys an air of nonchalance. He seems very comfortable in the resolution that this is Congress’s matter to resolve and not the Court’s.

So the hypothetical: what if Justice Scalia had not passed away in 2016? What would have been the result in Wayfair (decided in 2018)? For the reasons suggested above, Justice Scalia likely would have sided with the four dissenting justices. This is noteworthy given that Justice Scalia’s replacement on the court was Justice Neil Gorsuch.

Prior to his nomination to the Supreme Court, Justice Gorsuch was a judge on the Tenth Circuit Court of Appeals. Coincidentally, he was also one of the panel of three judges that decided Direct Marketing, both before and after it was remanded for consideration on the merits. On remand, the Tenth Circuit found that the Colorado notice and reporting statute was not in violation of Quill’s physical presence rule. This conclusion may have been inspired, in part, by Justice Kennedy’s concurring opinion. The Tenth Circuit applied Quill narrowly to use tax collection, and not beyond it. According to the court, while the Colorado statute required notice to Colorado customers of a use tax payment responsibility and a report to be filed with the Colorado state tax authority providing a summary of Colorado residents’ transactions, it required no use tax collection of out-of-state third parties. On this basis, there was no violation of Quill, and the Colorado statute was upheld.

Perhaps animated by the Supreme Court Justice for whom he clerked (Kennedy), then-Judge Gorsuch wrote separately to concur in the judgment and “acknowledge a few additional points that influenced” his thinking in the case. In many ways, his concurrence, at least insofar as it addressed Quill, was a declarative statement on the merits of the physical presence rule and precedent.

His initial posture with respect to precedent is one of substantial deference. He defends it as the mechanism through which “judges distinguish themselves from politicians . . . to apply the law as it is, not to reshape the law as they wish it to be.” He further notes that a justice system’s ability to interpret the law properly depends upon respect for precedent.

As applied to the dormant Commerce Clause generally, and to Quill particularly, Judge Gorsuch acknowledges the obligation for lower courts “to follow Quill out of fidelity to our system of precedent whether or not we profess confidence in the decision itself.” Yet this is the measured assessment of a Tenth Circuit Judge who notes his court could “never usurp the power to overrule a decision of the Supreme Court.” The negative implication of this statement leaves open the possibility that at least for then-Judge Gorsuch, the Supreme Court may overrule its own decisions.

Judge Gorsuch goes on to justify the Tenth Circuit’s reasoning in upholding Colorado’s notice and reporting law on the narrowness of Quill’s rationale, bending heavily under the weight of stare decisis and respect for Bellas Hess. He analogizes Bellas Hess to baseball’s judicially created immunity from antitrust law created in 1922 in Federal Baseball Club v. National League of Professional Baseball Clubs. There the Supreme Court exempted baseball from antitrust law on the (what now seems absurd) conclusion that the exhibition of professional baseball teams crossing state lines does not involve “commerce among the states.” The Supreme Court subsequently corrected course and found other exhibitions crossing state lines to be engaged in interstate commerce but never explicitly overruled Federal Baseball. Judge Gorsuch attributes this persistence to “respect for the reliance interests . . . the decision engendered in that particular industry.” He further notes that later Congress legislatively endorsed baseball’s exemption from antitrust law.

Justice Gorsuch’s analogy to Federal Baseball might be synthesized to this: the reliance interests created by precedent are so powerful, particularly in cases involving the dormant Commerce Clause, that it is appropriate for the Supreme Court to retain holdings that directly contradict subsequent decisions until Congress exercises its constitutional power to correct or confirm those decisions. If this line of reasoning is applied to Wayfair, it is a curiosity that Justice Gorsuch joined the majority. His analogy seems to square more with Chief Justice Roberts’s dissenting opinion. So what changed? Are the reliance interests of the baseball industry more important or more valid than the reliance interests of the entire online marketplace? (If baseball was the nation’s pastime in 1922, isn’t it fair to say that online shopping was the nation’s pastime in 2018?) Why was it appropriate in the name of precedent to maintain the incongruity of a one-off grant of immunity to baseball, while all other exhibitions enjoyed no such exemption, until Congress corrected or confirmed the exemption, but it was not appropriate to wait any longer in Wayfair for Congress to similarly respond?

Part of the answer to this question may be found in the conclusion to Judge Gorsuch’s concurring opinion on remand in Direct Marketing. In response to the question of whether Colorado’s notice and reporting statute, and the Tenth Circuit’s positive ruling with respect to it, would dilute the competitive advantage held by online vendors, Judge Gorsuch suggested it would and such a result would be “entirely consistent with the demands of precedent.” For Judge Gorsuch, Quill’s qualified endorsement of Bellas Hess’s physical presence test, while acknowledging its “formalistic” and “artificial” limitations, invited states to create legislative contortions subverting and working around the physical presence rule. He extrapolated on this thought to suggest that Quill’s narrow rationale set “a sort of expiration date for mail order and internet vendors’ reliance interests on Bellas Hess’s rule . . . ,” which would “never expand but . . ., if anything, [would] wash away with the tides of time.”

Judge Gorsuch’s poetic imagery describing the gradual erosion of Quill and any associated legitimate reliance interests do not clearly explain Justice Gorsuch’s joining the majority opinion in Wayfair. Judge Gorsuch considered Colorado’s notice and reporting statute to be an omen of things to come: that states would see Colorado’s success and implement similar policy in their own states. Wayfair—far from ebbing with the tides of time—was an earthquake in the SALT world, leaving reliance interests and precedent as rubble.

Regardless of how Justice Gorsuch reached this conclusion, he occupied the seat in which Justice Scalia sat. This change in the make-up of the court flipped a likely vote for upholding Quill to a vote for overturning Quill and represented the difference in this case. This, perhaps, illustrates the strongest case for precedent: should the state of the law hang in the balance and be subject to change based on personnel changes among the Supreme Court Justices? No. This is why stare decisis matters. The result in Wayfair serves notice that Supreme Court decisions are malleable, subject to overruling, as the personnel on the Court and the personal opinions of the Justices change. This inference has broader societal implications well beyond the collection of sales and use tax in the online marketplace.

5. Small Online Businesses and a Final Appeal to the Moon

To some extent, Wayfair, Overstock, and Newegg, must have considered themselves proxy litigants for the entire online marketplace. As such, part of their argument for the physical presence rule’s survival had no application in their own interests. They argued that the physical presence rule served as a meaningful protection for “start-up and small businesses” using the Internet “as a means to grow their companies and access a national market, without exposing themselves to the daunting complexity and business-development obstacles of nationwide sales tax collection.” The response to this point to a large extent (even if downplayed by Justice Kennedy in Wayfair) was the driving rationale behind Quill. This is footnote six in Quill speaking to the “welter of complicated obligations” with which a mail order catalog (or a small online retailer) will have to grapple without the bright-line physical presence rule.

Justice Kennedy’s response to this argument was acknowledgement, without sympathy or acquiescence, and a final iterative appeal to the moon. He concedes that burdens on small businesses “may pose legitimate concerns” as “State taxes differ, not only in the rate imposed but also in the categories of goods that are taxed . . . .” But for Justice Kennedy, these concerns would be tempered if not completely ameliorated, as “[e]ventually software that is available at a reasonable cost may make it easier for small businesses to cope with these problems.” By whom the software would be developed, how the cost would be reasonable, whether the states or private industry would confirm effectiveness, and who would be liable if the software malfunctions, Justice Kennedy does not say. He does, however, presume (without basis for doing so, beyond wishful thinking) that with the overruling of the physical presence rule, it may well be within a “short period of time” that such software becomes available.

Justice Kennedy must have sensed the inadequacy with which his response actually addressed the concerns relating to small online businesses. Not without some irony, he employed the same dormant Commerce Clause absolution tactic employed in Quill: “And in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so.” Thus, the luxury of deflection available to the Court when dealing with assumed Article I power: we will tinker with things as we care to do so, and Congress will fix whatever we get wrong.

It strains credulity for Justice Kennedy to employ this tactic when he was unwilling to let the legislative process playout so that Congress could address Quill. Moreover, this approach is a jurisprudential pretext for avoiding the reality of the SALT setting: the states have become more divergent in their sales and use tax laws, not less so, since Quill. There were over 10,000 separate taxing jurisdictions in place in 2018, more than one-and-a-half times as many as when Quill was handed down. Half the states have refused to voluntarily simplify their laws, thereby reducing burdens on and discrimination against interstate commerce, despite the opportunity to do so through the SSUTA.

Justice Kennedy references these simplification efforts in a final effort to placate. “Concerns that complex state tax systems could be a burden on small business are answered in part by noting that . . . there are various plans already in place to simplify collection . . . .” In making this point, however, Justice Kennedy ignores the direct consequence of the opinion he is writing: the only motivation States had to simplify and facilitate the sales and use tax collection process was in response to Quill. Thus, Justice Kennedy notes the prospect of simplification in one line and removes any incentive for it in the next.

6. The New Standard?

Justice Kennedy’s analysis concludes that Quill is “unsound and incorrect” and therefore must be overruled. It would be reasonable for States, out-of-state retailers, and residents alike to collectively ask: “OK, now what?” Justice Kennedy’s response to that question begins with first principles announced under the Complete Auto test’s first prong: that under the Commerce Clause a tax must apply to an activity with substantial nexus with the taxing state. He then curiously cites Polar Tankers, Inc. v. City of Valdez for the proposition that “nexus is established when the taxpayer [or collector] avails itself of the substantial privilege of carrying on business in that jurisdiction.”

This is an odd preliminary reference on at least two fronts. First, Valdez is not a Commerce Clause case. The matter was completely resolved by the Supreme Court’s determination that the City of Valdez’s personal property tax on large ships traveling to and from the city was unconstitutional under the Tonnage Clause. The Valdez Court’s reference to the Commerce Clause in relation to the city’s property tax ordinance was in passing, in response to a point made in the dissent, and was not dispositive to the case.

Second, and more disconcerting, the quote from Valdez—perhaps because it was only offering the analysis as a side note—incorrectly blends due process nexus and Commerce Clause nexus into a single, albeit brief, analysis. Valdez first noted that “a nondomiciliary jurisdiction may constitutionally tax property when the property has a ‘substantial nexus’ with that jurisdiction.” Under Complete Auto, “substantial nexus” is a Commerce Clause determination, whereas due process requires mere “nexus” with the jurisdiction. The Court then, in the same sentence, added that “such a nexus is established when the taxpayer ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” That is a direct quote from Mobil Oil Corp v. Commissioner of Taxes, which comes from a part of the opinion in which the Court is discussing the two requirements imposed on States to tax income under the Due Process Clause of the Fourteenth Amendment: (1) there must be “a ‘minimal connection’ between the interstate activities and the taxing state,” and (2) there must be “a rational relationship between the income attributed to the State and the intrastate values of the enterprise.” The Court in Mobil Oil went on to explain that the “requisite [due process] ‘nexus’ is supplied if the corporation avails itself of the ‘substantial privilege of carrying on business’ within the State.” Thus, the availment cited in Valdez was in reference to due process nexus (as purposeful availment always tends to be), not Commerce Clause nexus.

In Valdez, the inappropriate blending of the two analyses was of little consequence in the case because neither clause was relevant to its disposition. Justice Kennedy’s misincorporation of due process principles, however, in rearticulating what Commerce Clause “substantial nexus” would now require in a post-Quill world, is disappointing. Bellas Hess’s blending of due process nexus and Commerce Clause nexus led to more than two decades of uncertainty with respect to which clause actually supported the physical presence rule. Reverting to a similar commingled analysis seems misguided. Unfortunately, Justice Kennedy’s befuddling overture to framing a new Commerce Clause “substantial nexus” standard for sales and use tax was appropriate foreshadowing for what was to come.

Justice Kennedy’s inaccurate and incomplete framing of Commerce Clause substantial nexus was followed by an equally unsatisfying analysis. Concurrently, he clumsily pieced together an “economic presence” standard to replace physical presence, while he applied the very same standard, still in its inception, to Wayfair, Overstock, and Newegg—the proverbial building the airplane while in flight.

Justice Kennedy’s economic presence standard was misguided from the beginning, largely based on improper framing from Valdez. He found the Wayfair respondents nexus to be “clearly sufficient based on both the economic and virtual contacts respondents have with [South Dakota].” Measuring contacts between a state and an out-of-state vendor, virtual, economic, or otherwise, supports a due process analysis that calls for minimum contacts with the State. Historically, “substantial nexus” called for more than a mere measure of contacts. Unfettered by precedent, however, and apparently emboldened by describing a new standard derived from the misapplied Valdez dicta, Justice Kennedy was content to leave the question of substantial nexus at that.

He then turns to the South Dakota statute, first in the abstract, then as applied to the three large online retailers. In the abstract, he considers the alternative thresholds of “more than $100,000 of goods or services” sold into South Dakota, or “200 or more separate transactions” in South Dakota as a “quantity of business” that “could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.” Again, Justice Kennedy applies due process principles to a Commerce Clause determination. The Court’s Commerce Clause determinations that go well beyond Quill do not measure purposeful availment. Purposeful availment, in tandem with minimum contacts, is the spine of due process analysis. Having dispensed with Quill, Justice Kennedy must have perceived an empty canvas on which to paint new Commerce Clause nexus. This perception, however, was valid only insofar as consistent with the Court’s still valid Commerce Clause jurisprudence. Unfortunately, Justice Kennedy misappropriated notions of due process for Commerce Clause leaving the question of economic nexus a disjointed and unclear mess.

Perhaps in an attempt to gloss over the legalistic substitution of X for Y, Justice Kennedy turned to the application of the new economic presence standard to the parties at hand, without recognizing the much broader implications of the decision. The litigants could be classified as nothing other than “large, national companies that undoubtedly maintain an extensive virtual presence.” “Thus, the substantial nexus requirement of Complete Auto [was] satisfied in this case.”

Justice Kennedy must have known that such a pithy analysis provided little substance, apart from the South Dakota statute as a template, for states to craft policy and for out-of-state vendors to make business decisions. In an attempt to stake guideposts, he elaborated without clearly identifying one aspect as more important than another. He first highlighted the transaction and gross sales thresholds and classified them as safe harbors that protect from a sales and use tax collection obligation those “who transact only limited business in South Dakota.”

This assertion ironically fails to consider what the Commerce Clause is meant to prevent: undue burdens on interstate commerce. While a small online retailer may not ultimately have to collect sales and use tax in South Dakota, it will only arrive at this determination after making the potentially resource-intensive determination of whether the safe harbor applies. To be sure, Wayfair and Overstock can likely call up gross sales and transactions in South Dakota at a moment’s notice, but every possibility exists that a small online retailer may not have the wherewithal to do so as easily. This is to say nothing of the natural consequence of Wayfair: that all states that impose a sales and use tax have promulgated similar, but not identical legislation. Now a small online retailer must make the safe harbor determination on an annual basis with respect to up to 45 different states and the District of Columbia. Thus, even if for Justice Kennedy, South Dakota’s safe harbor provided protection for those out-of-state vendors with scant sales in South Dakota, the determination of whether the safe harbor applies could well be considered an unconstitutional burden on interstate commerce under Complete Auto’s third prong.

Justice Kennedy went on to point out that South Dakota is one of the more than 20 States that have adopted the SSUTA. He recognized the significance of this fact, as the agreement “standardizes taxes to reduce administrative and compliance costs” as it “requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules.” He further notes that the agreement requires states to provide software “paid for by the state” and carries with it immunity from audit liability.

Justice Kennedy’s recognition of the SSUTA and its crucial safeguards and facilitating measures for out-of-staters was a squandered opportunity to provide meaningful guidance on post-Wayfair economic presence. Justice Kennedy stopped short of declaring SSUTA or substantially similar legislation as constitutionally required. This, even though congressional proposals towards a federal solution would effectively have done just that.

Instead, Justice Kennedy abruptly curtailed the analysis after lauding the SSUTA’s redeeming features and declared that “[a]ny remaining claims regarding the application of the Commerce Clause in the absence of Quill and Bellas Hess” would “be addressed in the first instance on remand.” In sum, Justice Kennedy punted. The South Dakota statute is the tentative guidepost, but Justice Kennedy’s wishy-washy analysis left even that cairn in the fog. Some states have abided by South Dakota’s transaction/gross receipts thresholds, others have eliminated the transaction threshold, and others still have established their own gross receipts thresholds.

Despite Justice Kennedy’s laudatory but ultimately toothless endorsement, no state has enacted SSUTA legislation since Wayfair. Indeed, why should they? The incentivizing appeal of the SSUTA was that when all states had promulgated uniform legislation, they could collectively respond to Quill with a declaration that Commerce Clause burdens have been affirmatively mitigated. Wayfair annihilates that incentivizing effect. The States already have what they hoped to achieve through the SSUTA without paying the price of uniformity. In sum, Justice Kennedy delivered everything the States wanted, without price, without qualification, and without regard for small online retailers left to trudge through the post-Wayfair landscape.

VI. Conclusion

Wayfair exemplifies a truism of Supreme Court decisions: they can be overruled, but they cannot be freely undone. No matter how sincere Justice Kennedy’s desire was to correct perceived error in Quill’s physical presence rule and ameliorate its growing “egregious and harmful” effect since the inception of the online marketplace, there was a toll for reneging. This Article suggests that on balance, the harm exceeded the benefits from overruling Quill.

The toll was high. Wayfair left small online businesses in the lurch to manage compliance with the country’s 10,000-plus state and local taxing jurisdictions. Wayfair left reliance interests in tatters. It implied that private parties ought to anticipate the Court’s overrulings and that there are circumstances “where reliance upon a square, unabandoned holding of the Supreme Court” is not justifiable. Significantly, the Court’s credibility was sacrificed in Wayfair. This gives private parties reason not to take the Supreme Court “at [its] word.” That sacrifice nudged the Constitution closer to being “nothing more than what five justices say it is.” Post-Wayfair, uncertainty abounds, with a much less than clearly defined economic presence rule supplanting the physical presence rule, making it more onerous for small online businesses to prosper. On a broader level, with implications well beyond sales and use tax, Wayfair served notice that Supreme Court decisions are malleable, subject to revision and overruling, as the personnel and personal opinions of Supreme Court Justices change.

The perceived benefit from Wayfair is that the States, regardless of physical presence, can now expect to compel out-of-state retailers to collect their sales and use tax. This victory is diminished, however, given that the largest online retailer by many orders of magnitude, Amazon, began collecting in all states that impose a sales tax in April 2017, over a year before Wayfair was handed down. Had the Court meaningfully considered Amazon’s capitulation and left the physical presence rule intact, it could have emerged as a crucial protection for small online businesses, even while State coffers were substantially replenished.

The decision in Wayfair represents an ends-driven analysis and bears significant weaknesses when subject to scrutiny. Justice Kennedy employed an avant-garde standard of review, seemingly cut from whole cloth. His justification for bypassing stare decisis was at best wish-washy and at worst calamitous for those who expect the current Court to respect prior Court decisions. Justice Kennedy’s reformulation of the relevant Commerce Clause analysis impetuously blends due process and Commerce Clause principles, leaving waters surrounding the question murky and unsettled. On this account, the remnants of Quill—its due process analysis, which as discussed above, should remain intact as good law—may yet be important for clarifying the constitutional confusion that Wayfair created. This Article highlights Wayfair’s weaknesses and shortcomings and serves as a roadmap to challenge the decision.

The author thanks Andrew Appleby and Mark Loyd for their substantive comments and feedback while drafting this article. Additional thanks to members of The Tax Lawyer Editorial Board. This article benefited greatly from their excellent editorial work. The author dedicates this article to his wife, Jenny.