Originally published on Forbes.com.
In that category of things that don’t seem to make sense, we have this statement from the Tenth Circuit’s decision in its recent Direct Marketing Association decision:
When a neighborhood bookstore in Denver sells a book, it must collect sales tax from the buyer and remit that payment to the Colorado Department of Revenue (“Department”). When Barnes &sells a book over the Internet to a Colorado buyer, it must collect sales tax from the buyer and remit. But when Amazon sells a book over the Internet to a Colorado buyer, it has no obligation to collect sales tax.
Steamboats!
If you are not going to just settle for Reilly’s First Law of Tax Planning – It is what it is. Deal with it – , you can learn the reason for this possibly silly result by reading the decision. It has to do with something known as the “dormant Commerce Clause” first defined in the 1824 decision Gibbons v Ogden, which concerned the state of New York regulating those new-fangled things called steamboats.
The acts of the Legislature of the State of New-York, granting to Robert R. Livingston and Robert Fulton the exclusive navigation of all the waters within the jurisdiction of that State, with boats moved by fire or steam, for a term of years, are repugnant to that clause of the constitution of the United States, which authorizes Congress to regulate commerce, so far as the said acts prohibit vessels licensed, according to the laws of the United States, for carrying on the coasting trade, from navigating the said waters by means of fire or steam.
The “dormant Commerce Clause” was invoked in 1967, in connection with states collecting sales tax from out of state vendors in the National Bellas Hess decision, which forbade Illinois from requiring a mail order company to collect sales tax on items shipped into the state via mail and common carrier. That ruling was sustained in 1992 in Quill Corp v North Dakota and in his concurrence the, now late, Justice Scalia indicated the essence of the issue:
Congress has the final say over regulation of interstate commerce, and it can change the rule of Bellas by simply saying so. We have long recognized that the doctrine of stare decisis has “special force” where “Congress remains free to alter what we have done.”
Congress could regulate the way sales taxes are handled in interstate transactions, but until it gets around to it, states cannot force vendors with no physical presence in their state to collect sales tax.
Don’t You Pay Your Use Tax?
Why should there be such a big deal? I mean you and I both know that if somebody buys something that would have been subject to sales tax, but for some reason it is not collected, that person has to pay use tax on that item.Well you and I are totally scrupulous about paying use tax, but you might be shocked to learn that many people are not.The tenth circuit noted:
Because Colorado cannot compel out-of-state retailers without a physical presence in the state to collect taxes, the state requires purchasers themselves to calculate and remit use taxes on their purchases from out-of-state retailers. The regimes differ greatly in effectiveness—compliance with the sales tax is extremely high, and compliance with the use tax is extremely low.
When Massachusetts started asking taxpayers to send in some use tax with their income tax returns (Form 1 – Line 33), it started a long-running dispute between me and one of my partners as I tended to think that zero was generally an implausible answer and Massachusetts has a pretty stiff penalty for even minor fibs. Massachusetts lets you use an estimate based on AGI for use tax on items costing less than $1,000, which is a bargain for me given what an Amazon junkie I am. There are still people who insist on putting in zero though. The number of people who never order anything through the mail or pick up items while traveling is truly amazing.
Can’t Make Them Collect – Then Make Them Report
Colorado decided that even though it could not make vendors with no bricks and mortar in Colorado collect sales tax, the state could at least get them to help with the use tax.
To assist the state in collecting use tax from in-state purchasers, most seemingly unaware of their tax responsibility,3the Colorado legislature passed a law in 2010 that imposes three obligations on retailers that do not collect sales taxes—“non-collecting retailers”4 : (1) to send a “transactional notice” to purchasers informing them that they may be subject to Colorado’s use tax, (2) to send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases, reminding them of their obligation to pay use taxes on those purchases, and (3) to send the Department an annual “customer information report” listing their customers’ names, addresses, and total amounts spent (references omitted)
The Direct Marketing Association argued that this was unfair to out of state retailers since it made them do something that in-state retailers do not have to do. The Tenth Circuit did not show them much sympathy.
In light of the Colorado consumers’ preexisting obligations to pay sales or use taxes whether they purchase goods from a collecting or non-collecting retailer, the reporting obligation itself does not give in-state retailers a competitive advantage.
…..the reporting requirements are designed to increase compliance with preexisting tax obligations, and apply only to retailers that are not otherwise required to comply with the greater burden of tax collection and reporting. DMA has not shown the Colorado Law imposes a discriminatory economic burden on out-of-state vendors when viewed against the backdrop of the collecting retailers’ tax collection and reporting obligations.
So the deal now for Coloradans is that if the vendor they order from does not charge them sales tax, they will be reminded of their use tax obligation and, if they spend above the threshold, ratted out to the state tax authorities. I’m thinking that the rule might inspire some vendors to voluntarily collect sales tax (Some already do). Reilly’s Second Law of Tax Planning – Sometimes it is better to just pay the taxes. With the Tenth Circuit ruling, we might expect other states to enact similar statutes.
Some Expert Comments
I asked Professor Annette Nellen, who on 21st Century Taxation bemoans poor state tax compliance, for her thoughts on the decision. She wrote me:
This ruling illustrates the sad state of affairs in collecting sales tax in e-commerce. The law involved was enacted in Colorado in 2010! Here it is 2016 and a string of litigation going up to the Supreme Court now concludes that the Colorado law is constitutional. The law won’t even ensure collection of tax in Colorado from remote vendors. The law just requires certain remote vendors to issue information reports to the customer and the state if the customer buys more than $500 of taxable goods during the year. The state still has to hope the Colorado customer remits the use tax or go after them to collect it. The Quill case is over 20 years old. States have been hoping that Congress would exercise its power under the Commerce Clause to provide a uniform, sensible approach to improve sales/use tax collection in today’s e-commerce world. And main street vendors have been waiting for a system that will mostly eliminate a situation where online sales look like better deals because sales tax is not charged. Meanwhile, of course, the remote vendors worry about the increased cost and legal exposure of becoming tax collectors in more states. Basically, the case is a good example of the futile and desperate steps states are taking while waiting for Congress to take action. I’d like to see states take reasonable efforts to collect use tax while they wait – one good first step is working to be sure its residents know what a use tax is.
Other Coverage
Sally Schreiber had a nice summary of the decision for the Journal of Accountancy. Reed Smith had an extensive analysis and indicates that this decision might cause there to be another look at Quill.
Although Brohl I was a unanimous decision, Justice Kennedy’s concurring opinion urged the “legal system” to “find an appropriate case for this Court to reexamine Quill….” In his view, the technological advances in the decades since Quill require the Supreme Court to reevaluate Quill’s physical presence rule. He specifically addressed online retailers and their ability to reach customers across the country
Lisa Soronen, Executive Director of the State and Local Legal Center thinks the decision is quite important.
A dream shared by states and local governments nationwide may be realized shortly in Colorado. Use tax collection on internet purchases in the state may increase.