Wayfair, What's Fair, and Undue Burden
36 Pages Posted: 9 May 2019
Date Written: August 31, 2018
The Supreme Court in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), overruled the “physical presence” nexus rule that applied to a state’s imposition of a sales or use tax collection duty on a remote vendor as stated in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Wayfair seemingly replaced that standard with inquiries into whether imposing such duty violates principles of due process, or either discriminates against interstate commerce or results in the imposition of an “undue burden.” Wayfair concluded that the physical presence test was “unsound and incorrect,” a determination that was undoubtedly appropriate. But only two of the three standards the Court posited in its stead — due process and discrimination — reflect the Court’s pre-existing doctrine in the state tax area.
There are numerous difficulties with Wayfair’s undue burden analysis. Undue burden considerations were referenced in Quill, but as a component of that Court’s reasoning that Wayfair deemed wrong. The undue burden test is derived from the 1970 case, Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), which pertained to the state regulation of a commercial actor, not the imposition of a state tax. Pike has not generally been applied in the state tax context and is no longer favored by the Court even in the regulatory context. The reasons for the Court’s recent reservations with Pike in the state regulatory area apply equally, if not more so, in the state tax area.
Although it articulates an undue burden test, Wayfair suggests that the Court would not actually apply this test to a state’s imposition of a sales or use tax collection duty. Also, because there is no precedent for applying an undue burden test in the context of state taxes, it is not clear how it could apply, nor is it evident in what circumstances a remote vendor could successfully maintain such a claim. Wayfair’s consideration of undue burdens seems intended to encourage states to simplify their state and local tax systems as they apply to remote vendors, which is a laudable purpose. But the reference could give rise to needless litigation and confused lower court reasoning, a potential consequence that would hearken back to the after effects of Quill.
This article contends that in the aftermath of Wayfair, the due process and discrimination tests are sufficient to allay any constitutional concerns that could result from the state imposition of a sales or use tax collection duty upon a remote vendor. In particular, principles of due process should adequately address any concerns that the assertion of tax jurisdiction over such vendors would result in an undue burden. When a state tax is duly noticed and fair in its application, as due process requires, there is no issue as to undue burden.
Keywords: Wayfair, Quill, Bellas Hess, commerce clause, dormant commerce clause, physical presence, virtual presence, undue burden, Pike balancing, discrimination
JEL Classification: H25, H26, H7, H71, K34
Suggested Citation: Suggested Citation