Delivering for Best-in-Class Wholesaler-Distributors
June 25, 2018

Twenty-five years ago in Quill v. North Dakota, the US Supreme Court ruled that the lack of a physical presence (“substantial nexus”) in a State by an out-of-state seller prevents that State from compelling the remote seller to collect and remit that State’s sales tax.  While states may audit in-state purchasers who may be penalized for failing to remit their owed use taxes to their states, the enforcement of state sales/use tax laws has proven extremely difficult to achieve as states with sales/use tax laws are collectively foregoing an estimated $26 billion in revenue annually.  In its 1992 decision in Quill, the Court invited Congress to resolve this issue, stating, “The underlying issue here is one that Congress may be better qualified to resolve and one that it has the ultimate power to resolve.”

Since the Court’s disposal of Quill, the volume of e-commerce has exploded and continues to grow as a result of online sales via the internet.  According to the 2013 NAW Institute for Distribution Excellence/IBM Facing the Forces study, in the same way that the shift toward e-commerce is “rapidly transforming the retail landscape … e-commerce will now continue to transform wholesale distribution … by 2017 … the proportion (of online orders) is expected to surge … by 130%.”  The evolution of this marketplace dynamic places “brick and mortar” sellers, which must collect and remit states’ sales taxes at the point of purchase, at a clear price-generated disadvantage with remote online competitors.

The issue has been the subject of Congressional attention for several years. Most recently, the U.S. Senate in May 2013 passed the NAW-supported Marketplace Fairness Act (“MFA”) by a bipartisan vote of 69 – 27.  However, House consideration of the MFA was successfully blocked due to the opposition of the Chairman of the Judiciary Committee, Rep. Bob Goodlatte (R-VA-6).  A modified version of the MFA authored by former Rep. Jason Chaffetz (R-UT-3) and supported by NAW (the Remote Transactions Parity Act (“RTPA”) also failed to advance due to Chairman Goodlatte’s opposition.  Chairman Goodlatte prefers an approach to this issue that would base the permissible sales tax treatment of remote online sales on the tax rate of the state in which the purchaser is located (the “destination” state) and the tax base of the state determined to be the location of the seller (the “origin” state).  NAW cannot support an approach that includes an origin component because the necessity of achieving parity at the point of purchase is frustrated.

E-Fairness legislation has been introduced again in the current Congress, but at least until the Wayfair decision (see below), there was little chance of it moving.

Litigation:

South Dakota v. Wayfair: At issue was the validity of a South Dakota statute requiring sellers with “economic nexus” to collect and remit state sales tax regardless of physical nexus.  South Dakota acknowledged the statute in question runs afoul of the standard enunciated in Quill.  (A parallel case challenges the validity of the South Dakota statute on the grounds that it violates the Federal Constitution’s Commerce Clause and due process guarantees.)  In mid-January, 2017, a Federal District Court rejected the companies’ request that the case be heard in Federal court, and in early March last year the State court ruled as expected against the South Dakota law on the basis of Quill.  The South Dakota Supreme Court found the statute invalid on September 14th, and the State filed a petition seeking US Supreme Court review on October 2nd.  On October 23rd, NAW filed an amicus curiae brief in support of South Dakota’s petition which was subsequently granted.  Oral argument was heard in the Supreme Court on April 17th.  NAW was one of 23 parties to an amicus curiae brief in support of South Dakota’s position in this case.

On June 21st, the Supreme Court handed down a decision in the Wayfair case overturning the Quill decision allowing states to require out-of-state/on-line sellers to collect state sales taxes. This is a huge victory for our brick-and-mortar businesses. The immediate outcome of the case could be a “wild-wild west” situation in which the states individually begin the process of collecting the tax causing some confusion for on-line vendors and states alike – which might finally convince Congress to do what it should have done years ago and pass a fair Marketplace Fairness bill to streamline the sales tax collection processes going forward.

For more information, see NAW’s Legal Update.

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