High Court Urged Again to Review E-Retailer Tax Rule

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Tripp Baltz

Oct. 6 — Colorado is asking the U.S. Supreme Court whether its foundational standard for when states may impose sales and use tax on out-of-state retailers should be overturned in light of “the explosion of e-commerce to a multi-trillion dollar industry” ( Direct Mktg. Ass’n v. Brohl, U.S., No. 16-267, cross petition filed 10/4/16 ).

The physical presence standard affirmed by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) has caused “startling revenue shortfall in many States,” Colorado argued in a conditional cross petition for certiorari filed Oct. 4.

In a separate certiorari petition filed Aug. 29, the Direct Marketing Association requested the high court consider its challenge to Colorado’s 2010 law imposing reporting and notice requirements on out-of-state vendors that don’t collect and remit the state’s sales and use taxes. Several multistate taxpayer groups already have urged the high court to take the case.

The U.S. Court of Appeals for the Tenth Circuit ruled in February that Colorado's law doesn’t discriminate against or unduly burden interstate commerce.

Many watchers of the case have questioned whether DMA v. Brohl is the appropriate vehicle for challenging Quill. But as states like Alabama and South Dakota have mounted facial attacks on Quill through statutes and regulations, that may be changing.

Richard Pomp, professor of law at the University of Connecticut, told Bloomberg BNA Oct. 6 that in light of the “flood” of recent state challenges to Quill, the Supreme Court “might say to itself we should resolve this sooner rather than later.” The justices might also view Congress as seemingly incapable of accepting their “invitation to clean up this area.”

‘Quill' ‘the Only Reason.’

The DMA v. Brohl case is an appropriate vehicle for the Supreme Court to reexamine the divisive physical presence rule, Colorado said in its 47-page cross-petition. “ Quill is the only reason that the States treat in-state and out-of-state retailers differently; without it, Colorado and other States will treat retailers alike, regardless of their in-state or out-of-state location,” the state said.

In Quill, the Supreme Court said states can't require a retail business to collect sales and use taxes unless the business has a physical presence in the state. According to Colorado’s petition, courts and commentators agree that the rule lacks doctrinal justification, given that states may impose other regulations on businesses that lack a physical presence within the regulating state’s borders.

Colorado’s notice and reporting statute, approved in 2010 by the state General Assembly to spur out-of-state retailers that don't collect and remit tax to begin doing so, requires such non-collecting retailers to report to the state Department of Revenue consumer sales over an annual threshold and to notify consumers of their obligation to pay the tax.

The DMA argues in its certioriari petition that the law violates the interstate commerce clause and asks the court to overturn the Tenth Circuit's finding that the notice and reporting requirement doesn’t discriminate or unduly burden interstate commerce.

DMA ‘Evades Issue.’

The DMA petition evades the issue of whether Quill should be revisited, Colorado says in its cross petition. “DMA evades that issue because Quill exempts its members from collecting sales and use taxes, a burden that every instate, and many interstate, businesses must bear,” the state said. “ Quill confers a competitive advantage; DMA seeks to protect it.”

The state urges the court to deny the DMA's petition for review, but if the court decides to take up the case, it should reframe the DMA’s questions about Colorado’s law concerning the applicability of the commerce clause’s antidiscrimination doctrine as a single question of national importance: “By enacting a law to enforce the existing and constitutional use tax within the limitations of Quill, does a State run afoul of the antidiscrimination principles of the dormant Commerce Clause?”

Absent Quill, the cross-petition said, Colorado wouldn't “have been required to enact the reporting law challenged here.” The state noted that in an earlier phase of the DMA case, Justice Anthony M. Kennedy “recognized the importance and urgency of this question when this case first came before the Court, stating that ‘it is unwise to delay any longer a reconsideration of the Court’s holding in Quill’ ” (2016 Weekly State Tax Report 12, 9/23/16).

‘Odd Wording.’

George Isaacson of Brann & Isaacson in Lewiston, Maine, attorney for the DMA, told Bloomberg BNA the question Colorado is seeking the court to answer was “oddly worded.”

“They’re saying, if you grant DMA’s petition, don’t take their question, but instead rephrase the question,” he said. “Even if the court was inclined to use this case as a vehicle for considering Quill,, I don’t think they do so with the question that’s been phrased by the state. I actually don’t even understand the question that’s been posed by the state.”

Isaacson said he wonders whether the state is actually eager to have the case used as a vehicle for reconsideration of Quill. “I don’t know whether this is simply in fact another effort to try and get a Quill decision as soon as possible, or whether this is a tactic in saying the court shouldn’t take this case,” he said. The state’s saying that the case involves issues beyond what the petitioner is seeking in review “may be part of the strategy” to get the court to deny the petition.

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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