- January 2017
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 on remote transactions has proven extremely difficult to achieve as states with sales/use tax laws are collectively foregoing an estimated $25 billion 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 principally 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 their remote online competitors.
This issue has been the subject of Congressional attention for several years. Most recently, the Senate in May 2013 passed the NAW-supported Marketplace Fairness Act (MFA) by a bipartisan vote of 69 – 27, but the measure was never taken up by the House. During the 114th Congress just passed, the MFA was reintroduced in the Senate by Senators Mike Enzi (R-WY), Richard Durbin (D-IL), Lamar Alexander (R-TN) and Heidi Heitkamp (D-ND). Rep. Jason Chaffetz (R-UT-3) introduced a modified version of the MFA (Remote Transactions Parity Act (RTPA)) with bipartisan support in the House. House Judiciary Committee Chairman Bob Goodlatte (R-VA-6), an opponent of the MFA/RTPA approach, circulated various drafts of his Online Sales Simplification Act (OSSA), the last of which proposed to base the permissible tax treatment of remote online sales on the tax rate of the destination state (the state in which the purchaser is located) and the tax base of the origin state (the state determined to be the location of the seller). NAW cannot support an approach that includes an origin component because the necessity of achieving parity at the point of purchase is frustrated.
In December 2015, a Congressional session-ending effort to pair a bill embracing an MFA/RTPA-like approach with a House-passed bill by making permanent the federally-mandated exclusion of internet access to state taxation, was unsuccessful. As the second session of the 114th Congress approached at the end of 2016, a similar fate awaited an effort to package an MFA/RTPA-like approach with other state tax-related issues. The legislative path forward for this issue in the just-convened 115th Congress has yet to clarify itself.
South Dakota v. Wayfair: At issue is 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 acknowledges the statute in question runs afoul of the standard enunciated in Quill. Oral arguments were heard in Federal District Court on December 5th. In a parallel case, the validity of the South Dakota statute is being challenged in a suit that claims the law violates the Federal Constitution’s Commerce Clause and guarantees of due process.
DMA (Data and Marketing Association) v. Brohl (Colorado Commissioner of Revenue): On December 12th, the US Supreme Court refused to review the decision of the US Court of Appeals for the 10th Circuit which upheld a Colorado statute imposing a reporting requirement on sellers that do not collect sales taxes on transactions in Colorado. The court found that the Colorado statute does not violate applicable Commerce Clause precedents because it does not impose a sales tax collection requirement.