Originally published on Forbes.com.
Some of the most controversial topics have Supreme Court decisions associated with them. Roe v Wade on abortion and Obergefell v Hodges on same-sex marriage are examples. In the world of SALT (State and local tax) the big word from the Supremes was in Quill v North Dakota. The holding in the 1991 decision was that a state could not require a retailer to collect sales tax, if the retailer did not have a physical presence in the state. Of course the end consumer would still be liable to pay use tax on the purchase, but compulsive as you and I are about sending in the proper use tax, you will be astounded to learn many people don’t even give it a thought.
Quill’s Days Are Numbered
There is a sense out there that Quill’s days may be numbered. Last month the Tenth Circuit in Direct Marketing upheld a Colorado law that requires out of state vendors that don’t collect Colorado sales tax to inform customers of their use tax obligation and give them annual reports of their purchases subject to use tax and provide the same information to the state.
The reporting requirements may have created a situation illustrative of Reilly’s Second Law of Tax Planning – Sometimes it’s better to just pay the taxes. Also last month, whether coincidently or not. Amazon began charging Colorado sales tax.
I thought the Direct Marketing decision was quite a big deal. For my piece on it, I heard from Professor Annette Nellen, a long term advocate of reform in this area. She was pleased but not that pleased with the decision.
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.
Experts Weigh In
I spoke with Tom Corrie who heads the SALT practice at Friedman LLP. He shared with me that one of his motivations in getting involved in SALT was that with over 10,000 taxing jurisdictions in the United States, there will always be SALT work to be done, On Direct Marketing he said:
It’s quite a big deal. The states have been trying for quite some time since the tremendous growth of the internet sales market to find a way to circumvent the Quill decision.
Tom pointed out to me that Alabama has already instituted a direct assault on Quill. Rule 810-6-2-.90.03 requires vendors with sales of tangible property in Alabama in excess of $250,000 to collect sales tax regardless of physical presence. Alabama Revenue Commissioner Julie Magee seems to have a “bring it on attitude” toward Quill litigation.
“Why would we continue to work under an antiquated court ruling? Look how old Quill was,” Magee told Tax Analysts in September, echoing an argument state representatives have been making about physical presence for at least the last 15 years. “Times change, and things were once constitutional and they’re not constitutional anymore. It is time for some sort of paradigm shift, and we can’t continue to remain under the Quill ruling.”
Joseph Crosby of MultiState Associates wrote me
Justice Kennedy’s concurring opinion in DMA v Brohl most certainly opened the door wide to states which are interested in seeking a review of Quill. Based on legislative activity this year, several states soon may be positioned to challenge Quill. In a nutshell, if Congress doesn’t act, then a challenge to Quill is most definitely coming.
Sylvia Dion, one of the stars of my on again off again women in accounting series, had quite a bit for me
The Colorado Notification and Reporting (N&R) law that was recently upheld by the Federal Tenth Circuit Court and which you covered in your recent Forbes blog post, is just one example of an aggressive law passed by a state in an effort to find a way to either force remote retailers – and in general, online remote retailers – to either collect their state’s sales tax or improve the self-reporting of the use tax by the state’s residents.
You see, this trend we’ve observed in recent years of states enacted nexus expanding provisions, such as laws that attribute sales tax nexus to a remote retailer that engages unrelated in-state marketing affiliates that post a web-link on their in-state website that refers visitors to the remote retailer’s website (the so-called “Amazon Laws”) or that attribute sales tax nexus to a remote retailer with related entities operating in the state (even if those entities aren’t engaged in retail activity) are examples of states efforts to redefine what it means to have a physical presence in their state so that the state’s law meets the Quill physical presence requirement and a nexus conclusion can be reached. But in my view, states are taking this to the extreme and really stretching what is means to have an in-state “physical presence.”
And speaking of “economic nexus” – Alabama is another state that has not only stretched, but completely obliterated the physical presence requirement by enacting an “economic nexus” standard for the sales tax collection purposes. The Alabama economic nexus provision, which became effective on January 1st of this year, no longer requires that a remote retailer have a physical presence – sales tax nexus is achieved if a remote retailer has “economic nexus” to Alabama based on its new economic nexus law. I think we’ll see more states take this approach – as matter of fact, a South Dakota economic nexus proposal has already been passed by both the South Dakota House and Senate.
Sylvia has written quite a bit on this issue including this piece for Bloomberg and on her own blog.
Is There A Better Way?
So there could be any number of states that end up challenging Quill in the Supreme Court. I’m kind of rooting for Alabama, because I think Commissioner Magee’s twitter feed is so cool.Of course the Supremes did point another way out of this mess back in the day, when it was all about “mail order”.
Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.
It’s only been twenty five years. They’ll get to it.