Originally published on Forbes.com.
The most exciting thing going on this year has to be the Supreme Court’s consideration of South Dakota v Wayfair. Absolutely. No question. Well, that’s if you are a SALT (state and local tax ) geek. A more generalized tax geek like myself has more to choose from. I’m thinking that the Grain Glitch fix was a really big deal, but a couple of weeks ago I had call to talk to a number of CPAs and none of them ever knew about the Grain Glitch.
Regardless, I was slow getting onto the oral arguments in Wayfair. They were on April 17 and I thought Professor Samuel Brunson’s God And The IRS was more interesting. I finally listened to them yesterday after rounding up comments from a couple of SALT experts. There has been enough coverage that I can’t promise that I will be adding something, but I will at least try to make more discussion more fun – and I have a couple of really good experts. Here we go.
Quill
Marbury v Madison, Dred Scott v Sandford, Plessy v Ferguson, Brown v Board of Education of Topeka, Miranda v Arizona, Roe v Wade. That is what is likely to pop into your head if you were on Family Feud and the category was Supreme Court decisions. Not if you are SALT geek. For them, it is Quill Corp v North Dakota. The holding in Quill was that a state could not require a merchant to collect sales tax on items that were shipped through the mail or by common carrier if the merchant had no physical presence in the state. Quill was back in 1992, before the internet became a thing for regular people.
Now you might be wondering why this should be a big deal. When you are charged sales tax by a vendor, it saves you the trouble of remitting use tax to your state. It is not like it really saves you anything if the vendor does not charge sales tax. Well, I have to tell you. Use tax compliance is really not that good. The subject of use tax came up a couple of times in the oral arguments, but I have to wonder how anybody was able to keep a straight face. Some states, including Massachusetts, ask for use tax on the income tax return which makes compliance easier, but there remains a good bit of resistance.
Quill is based on something called the “dormant commerce clause” doctrine. The idea is that if Congress has chosen not to regulate an aspect of interstate commerce, states don’t get to step in. It just ends up not being regulated. The interesting thing about a decision under the doctrine is that, unlike other Supreme Court decisions, Congress can, in effect, overturn it by taking action. Since Quill there has been much talk of Congressional action, but no action.
The Little Guy
There was no e-commerce to speak of when Quill was decided, but the physical presence test was considered to apply to e-commerce as it does to the mail order catalog model that it was meant for. That has states worried that their residents will buy everything from Amazon and all the nice little “bricks and mortar” stores will shut down and “Main Street” will be deserted. Of course, Amazon is collecting sales tax now, but we don’t need to change the narrative because of small details like that. And incidentally the states would like to be getting the revenue without seriously trying to enforce use tax.
There is another little guy, though. He had the foresight to stock his basement with Pokemon cards and now makes a modest living selling them over the internet along with Spanish American War memorabilia and models of PT 109. There are on the order of 10,000 sales tax jurisdictions. It is not just that there are numerous different rates to consider. There is substantial variation in what is or is not taxed and subtleties like how you are supposed to treat different types of coupons. “Pete’s Pokemons and PTs” may have an insurmountable compliance problem, if Quill is overturned. There was discussion about software solutions, but that ain’t so easy.
Where’s Congress?
The oral arguments had quite a bit about Congress not acting on this matter and wondering what that implied. Is Congress just fine with the Quill standard? And maybe there is not such a problem since the really big guys like Amazon will likely end up with physical presence everywhere (well maybe not North Dakota). And some of them are collecting sales tax regardless.
Anyway, so much or my thought. On to my experts.
Tom Corrie
Tom Corrie, an attorney, is a principal at Friedman LLP where he heads the firm’s SALT group. Friedman is a top New York based accounting firm. Mr. Corrie wrote me:
I think it is obvious from a number of the Justice’s comments (e.g., Sotomayor, Kagan, Breyer) that they are struggling with whether this is an issue that should be determined by the judiciary, particularly in light of several important issues. Among them are retroactive application of the proposed overturn of the Quill decision, minimum nexus thresholds (one sale was set forth by Jackley as being enough), and the impact on small businesses should Quill be overturned. While the arguments put forth by the State in this case focused on fairness with respect to small “bricks and mortar” in state businesses, I think the Justices also expressed concern for small out-of-state businesses and whether many of them would be able to withstand the additional costs that would be pressed upon them in the case of an overturn. Perhaps their concern is focused on the impact nationally as opposed to the State’s vested interest in its economy. I also think the Justices expressed frustration in both parties lack of preparation of materials that would better support their position. For example, more data on the cost of sales tax compliance on a national multi-state basis when contrasted to the costs of a Colorado type use tax reporting system.
Over all, based on the questions posed by the Justices and the answers they received, I think that neither party should take great comfort at this point. I think there is a lot of conflict among the members of the Court regarding the issue.
The Colorado comment is another intriguing option. I wrote about the Colorado system of having out of state vendors rat out their customers rather than collect from them here.
Sylvia Dion
Sylvia Dion is a CPA and the founder and managing partner of SALT consulting firm, PrietoDion Consulting Partners LLC. Ms. Dion was featured in my on again off again series on women in accounting (a new post on that is coming soon). Ms. Dion wrote me:
If you’d asked me as recently as two months ago whether I thought the U.S. Supreme Court will overturn Quill, I would have answered that I definitely believed the U.S. Supreme Court would. On one hand, Quill was decided in 1992, when the internet was literally a newborn. In 1992, the Supreme Court Justices deciding Quill couldn’t have even imagined how eCommerce would evolve. Also, keep in mind that in Quill, the Supreme Court was re-affirming National Bellas Hess, a Supreme Court case that was decided in 1967, twenty-five years prior to Quill! So in effect, we’re dealing with a precedent that was established 51 years ago! And so, yes, just a few months ago, I thought perhaps the Supreme Court might think it’s time to overturn Quill. But upon listening to the oral hearing, it was clear that not every Justice was ready to overturn Quill. I would guess many of my SALT colleagues had similar observations. It seemed, based on the Justices questioning during the hearing, as well as certain Justices’ opinions expressed in prior decisions, that Justices Kennedy, Thomas, Ginsburg, and Gorsuch are likely to vote to overturn Quill – while Justices Roberts, Alito, Sotomayor, and Kagan might vote to preserve the Quill decision. Justice Sotomayor seemed quite bothered that perhaps states weren’t doing enough to collect use tax from their own residents. Justice Breyer, seemed to be very much on the fence. At one point during oral argument he basically said that each side’s briefs were very compelling but both sides can’t be absolutely right. With four Justices seeming to be on one side or the other, it’s too close to predict.
As a SALT practitioner that works with many online retailers (a main focus are of my practice), it’s not just about plugging in software and pushing numbers and payments to a state. I can absolutely understand (and affirm) Justice Sotomayor’s concerns on the added administration and costs smaller sellers will face. You see, states sales tax laws are complex and not uniform – and I’m not just talking about rates being different – it’s differences in how states tax certain items. For instance, clothing might be fully taxable, partially exempt, or fully exempt depending on the state. Massachusetts, for instance, exempts single articles of clothing with a sales price of up to $175, Connecticut’s partial clothing exemption has changed several times in the past few years, and Pennsylvania generally exempt clothing but not all types.
Another issue is that in states that exempt clothing, how does each state define clothing – are belts, watches or caps considered clothing too? Now add to this that states periodically hold sales tax holidays during which purchases can be made without added sales tax during the “holiday” period. An out-of-state online clothing retailer with nexus in a far-away state, would need to contend with these rules and nuances. Additionally, once registered, states will send all forms of communications – notices of tax rate changes (and yes, there are over 10,000 taxing jurisdiction in the U.S.), notification of filing frequency changes, nexus questionnaires to determine if a newly registered taxpayer has nexus for taxes other than sales taxes, etc. I have my own online retail clients forward all state communications to me so that I can best advise them – so I know first-hand the additional administration that comes with being registered in multiple states.
I do fear that if Quill is overturned, the gates will open and many more states will see this as an opportunity to enact South Dakota styled laws – focusing on revenues and transaction thresholds to assert sales tax nexus. Several states have already enacted economic nexus laws that are virtually identical to South Dakota’s, including Indiana, Maine, North Dakota and Wyoming. The economic nexus laws in these states all assert nexus based on an out-of-state taxpayer making sales into the state of more than $100,000 or in 200 or more separate transactions. No other activity need be present. While the $100,000 is a fairly significant revenue threshold – I’m most concerned about the “or 200 or more separate transactions” as this means many smaller online retailers could be impacted by these laws.
If the Supreme Court doesn’t overturn Quill, then federal remote seller legislation, such as the Marketplace Fairness Act or Remote Transaction Parity Act, would need to be enacted for states to be granted more authority to require out-of-state retailers to comply with their sales tax laws. But Congress has been trying to pass federal remote seller legislation for years – with the same proposals being introduced session after session. I don’t feel a federal proposal is likely to be enacted any time soon – especially given our dysfunctional Congress.
A Caution
The last time I covered oral arguments – the Seventh Circuit on parsonage -, I was cautioned that you can’t really make inferences from the questions that the judges raise. They might be playing devil’s advocate against the way they are leaning making them sound like they are leaning the other way.