A historic Indian trading post at Kewa Pueblo in New Mexico was nearly destroyed by fire in 2011. The tribe has since reopened the historic Santo Domingo Trading Post after a renovation project. Photo: killbox

States win big victory with Supreme Court ruling on online taxation

Thursday, June 21, 2018

The nation's highest court has opened the door for states to impose taxes on internet sales, a major development that further encroaches on tribal efforts to expand their economies.

By a vote of 5 to 4, the U.S. Supreme Court on Thursday overturned a decades-old precedent that limited the ability of states to collect taxes from online retailers. Writing for the narrow majority, Justice Anthony Kennedy simply said the prior decision was "wrong."

"The Internet’s prevalence and power have changed the dynamics of the national economy," Kennedy observed in the 24-page decision.

But if Indian Country is looking for guidance on whether states can tax reservation residents who buy music on iTunes, blankets from Pendleton or food on Amazon.Com, they won't easily find it in South Dakota v. Wayfair. Neither Kennedy, nor any of his colleagues, addressed issues that tribal interests had raised in a brief to the high court.

The only mention of Indian law in fact came from the dissent and it was only to make a point. Chief Justice John G. Roberts cited Michigan v. Bay Mills Indian Community, a key sovereign immunity case, twice in order to underscore the dramatic nature of the Wayfair decision.

"This court 'does not overturn its precedents lightly,'" Roberts wrote in the dissent, quoting from Bay Mills.

"The bar is even higher in fields in which Congress 'exercises primary authority' and can, if it wishes, override this court’s decisions with contrary legislation," he continued, again quoting from the 2014 ruling in Bay Mills.

Indianz.Com on SoundCloud: U.S. Supreme Court - South Dakota v. Wayfair - April 17, 2018

Despite the lack of clarity, one economic development expert believes Wayfair can be used for good. Gavin Clarkson, a citizen of the Choctaw Nation who recently fell short in his bid for U.S. Congress and is hoping to run for another public office in New Mexico, said tribes should use the decision to bolster their sovereignty.

"Amazon and other online retailers have been wrongly imposing state sales taxes on on-reservation online shoppers for years," Clarkson told Indianz.Com. "Tribal governments should now be able to insist that online sales to on-reservation residents should be exclusively subject to tribal sales tax."

"Although the Wayfair court did not examine the issue of tribally-imposed sales taxes, the rationale used to justify state sales tax on remote online retailers is equally applicable to tribal sales taxes, and nothing in the court's reasoning would justify double-taxation for online purchases shipped to a reservation address," added Clarkson, who has worked on taxation, economic development and finance issues in Indian Country for more than two decades.

Meanwhile, South Dakota Attorney General Marty Jackley (R), who suffered a big loss in the state's Republican primary earlier this month, is celebrating. He called the Wayfair ruling a victory for small businesses, whom he said were hindered by the court's prior ruling on internet taxation.

“Today’s landmark decision is a win for South Dakota and for Main Street businesses across America that will now have a level playing field and tax fairness,” Jackley said in a statement.

Today’s landmark Supreme Court decision is a win for South Dakota and for Main Street businesses across American. #levelplayingfield pic.twitter.com/IlWpMjlLKU
— SD Attorney General (@SDAttorneyGen) June 21, 2018

With its 1992 decision in Quill v. North Dakota, the Supreme Court limited the ability of states to collect taxes from online sales. A retailer must have a physical presence in a state in order to be taxed by the state, according to the ruling.

Wayfair overturns Quill, and in a big way. The Supreme Court's opinion notes that states are losing out on $8 and $33 billion every year by being unable to tax certain retailers.

"When it decided Quill, the court could not have envisioned a world in which the world’s largest retailer would be a remote seller," Justice Kennedy wrote.

Indian Country is losing out too. According to receipts seen by Indianz.Com, reservation residents often pay taxes when they purchase music, movies or other content from Apple's popular iTunes store but their tribes aren't seeing any of those revenues.

"Blackletter federal law renders reservation Indians and those who trade with them immune from state sales taxes," a brief submitted by the National Congress of American Indians and seven tribes read. "Any erosion of that rule would exacerbate the problem of double taxation."

A slide presented during the annual convention of National Congress of American Indians in October 2017 explains the background of the Indian Trader Regulations, which govern economic activity on reservations. Photo by Indianz.Com (CC BY-NC-SA 4.0)

Tribes have been fighting double or dual taxation for decades, calling it a threat to their economic growth. Some states are taxing businesses who set up shop on reservations, taking tens of millions of dollars away communities where infrastructure and other basic needs are critical.

Wayfair has the potential to draw even more of those revenues away. Due to their remote locations, reservation residents often rely on online or mail-order businesses for basic goods.

"I'm sure there's people on your reservations who buy things online, they buy things in mail order," John Dossett, NCAI's general counsel, told tribal leaders during the organization's winter session in Washington, D.C., earlier this year. "Does the state get to collect those taxes or does the tribe get to say who collects the taxes?"

Tribes thought they were going to get a leg up in the battle with an update to the so-called Trader Regulations. Work began toward the end of the Obama era in hopes of Indian stopping states and local governments from imposing their taxes on reservation businesses.

But many tribal advocates now believe the Trump administration has killed the effort. Though the comment period on the rule closed eight months ago, the Department of the Interior has not taken any steps to finalize the rule.

Meanwhile, the Trump team continues to push forward changes to the land-into-trust process that tribes say will make it impossible to restore their homelands. A series of listening sessions and consultations concluded on May 31, with written comments due at midnight on June 30.

Tribal leaders have repeatedly pointed out the seemingly mixed messages coming from Washington. The Trader Regulations, they say, promote growth on reservations. The proposed changes to the Fee-to-Trust Regulations (25 CFR 151), do the opposite by elevating the concerns of state and local governments, the say.

"Do you think local governments don't know that tribes provide jobs to non-Indians, many of whom live in depressed areas of counties?" asked Chairman Harry Pickernell Sr., of the Confederated Tribes of the Chehalis Reservation at one of the final consultations on the land-into-trust rule. "Isn't that a benefit to the entire county and state economies that far exceeds the loss of some real estate tax revenue or infrastructure impacts?"

"What happened to the tribes are sovereigns?" he added.

The Wayfair case involved three internet retailers who challenged South Dakota's online tax law. Wayfair, Overstock.com and Newegg lack physical presences in the state but were required to pay taxes under a state law that applies to certain businesses.

"Wayfair has long supported a legislative solution that would establish a level playing field for brick-and-mortar and online retailers by permitting states to collect sales tax on online sales," lead plaintiff Wayfair said in a statement. "While we believe the court was not the ideal venue for creating this level playing field, we expect that today’s decision will bring clarity and certainty to this issue."

U.S. Supreme Court Decision in South Dakota v. Wayfair:
Syllabus | Opinion [Kennedy] | Concurrence [Thomas] | Concurrence [Gorsuch] | Dissent [Roberts]