‘Quill' Cases Goading Congress on Remote Nexus, Sellers Hope

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

By Jennifer McLoughlin

May 11 — The clash over South Dakota's “Quill killer bill” seems to be cultivating one consensus: Congress can no longer ignore the burgeoning conflict over online sales tax that is spreading coast to coast.

South Dakota recently emerged as a legal battleground over its measure (S.B. 106) to redefine nexus for remote retailers, which requires out-of-state sellers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax (2016 Weekly State Tax Report 21, 5/6/16).

This challenges the U.S. Supreme Court's 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298, which imposes a physical presence threshold for sales and use tax.

While a South Dakota Department of Revenue statement indicated that the pending litigation triggered an injunction enjoining enforcement of the law, the DOR has since suggested that it may require compliance. This has some practitioners scratching their heads.

Amid the growing pressure on remote retailers, the louder call isn't for a singular state solution, but for a federal fix.

“Time will tell whether the pressure being placed on internet retailers by these state attacks will motivate the reluctant members of Congress to create a federal framework for taxing internet commerce,” Stephen P. Kranz, a partner with McDermott Will & Emery LLP, said in a May 10 e-mail. “One is needed. And only Congress can do it.”

Ignoring Injunction?

Lawsuits filed April 28 and 29—one by the South Dakota DOR and the other by associations representing e-commerce businesses and catalog mailers—are seeking declaratory judgments over the constitutionality of South Dakota's attempt to capture remote vendors.

In an online statement, the DOR advised that its case prompted “the automatic injunction of Section 3 of Senate Bill 106.” That section provides for an injunction “during the pendency of the action, applicable to each state entity, prohibiting any state entity from enforcing the obligation in section 1 of this Act against any taxpayer who does not affirmatively consent or otherwise remit the sales tax on a voluntary basis.”

Since the passage of S.B. 106, which has an effective date of May 1, about 70 remote sellers have applied for a South Dakota sales tax license, according to Jonathan Harms, communications director for the South Dakota DOR.

Noting that it is the DOR's “duty as a government agency to uphold the law,” Harms said in a May 11 e-mail that “we will continue to work and communicate with remote sellers in order to make sure there is understanding and compliance.”

For example, Harms said that as the DOR “continues to implement this law,” a registered remote retailer that collects sales tax, but fails to remit, would need to issue a refund to customers.

However, practitioners are curious about how the DOR can, and plans to, implement the law.

“If the state issues tax assessments, they run up against their own law, since it has an automatic injunction clause,” Steve DelBianco said in a May 11 e-mail. DelBianco is the executive director of NetChoice, a named plaintiff in the South Dakota case contesting S.B. 106 as facially unconstitutional.

Scope of Statute

The pending litigation—and potential injunction—doesn't necessarily absolve retailers with a potential physical presence in South Dakota of their tax obligations.

“For companies that may have risk under the Quill nexus standard, they can take advantage of the opportunity to clean that up and begin complying,” Kranz told Bloomberg BNA May 11, discussing registration of retailers who may have an existing physical presence nexus risk in South Dakota.

“Each seller is responsible for researching their local laws about collecting and reporting taxes on their Etsy sales,” Julie Stitzel, senior manager of Federal Advocacy and Policy at Etsy Inc., said in a May 9 e-mail, adding that Etsy continues to monitor the issue. “Requiring these sellers to now research a foreign jurisdiction's laws is what makes S.B. 106 so onerous.”

Increasing Awareness

As the cases run their course, practitioners are cautioning retailers to keep a watchful eye on South Dakota and other states.

“Companies who are not collecting in the states that have passed or are considering legislation should be paying attention,” Kranz said. “Fortunately, South Dakota legislated that there would be no retroactive imposition but that is not true in states that are taking the same approach administratively.”

DelBianco said that retailers have been in touch regarding both South Dakota's move and other states' activity.

“Several of the businesses supporting our lawsuit are not members of ACMA or NetChoice, so there is already broad appreciation for challenging the state law,” he said in a May 11 e-mail, adding that “there is plenty of angst and anger at states who say they want a congressional solution, while undermining Congress with a law designed to overturn 200 years of federal doctrine.”

Reviving Congressional Response

Kranz noted that the states' campaign against Quill hasn't appeared to move the needle in Congress. Retailers are hoping that the South Dakota litigation is the catalyst, or part of a larger stimulus, to a congressional solution.

Judicial review “could close the giant loophole in states' sales tax collections, but it could also lead to a patchwork quilt of different state sales tax laws that retailers would need to comply with,” Robin Winchell Roberts, senior director of media relations for the National Retail Federation, said in a May 11 e-mail. “Federal legislation is the only solution that would be fair to Main Street retailers, simple for online sellers and allow states to collect the taxes that are owed.”

Several federal iterations of e-commerce legislation have surfaced and garnered business backing—including the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA)—but have stalled. The MFA received significant bipartisan support from the U.S. Senate in 2013, but failed to pass the House, and has since met with political resistance (2016 Weekly State Tax Report 25, 4/29/16).

A proposal that has yet to be formally introduced, Rep. Robert W. Goodlatte's (R-Va.) Online Sales Simplification Act, has also received retailer backing for its origin-based approach. Among its supporters are NetChoice and its co-plaintiff, the American Catalog Mailers Association (ACMA).

Delaying a Solution?

Etsy, which supports the NetChoice and ACMA lawsuit, agrees with the intent of South Dakota's law, “allowing states to collect the tax they are due,” but equally disputes the legislation as “unlawfully expanding the state's taxing authority.”

Also endorsing Goodlatte's proposal, Etsy voiced concerns about the tax compliance burdens of cross-border transactions imposed by the MFA and the RTPA, threatening “to shut down online micro and small businesses.”

“Rather than pursuing a patchwork approach to taxation that risks stifling innovation and competition in the U.S., we support a federal compromise developed by the House Judiciary Chairman Bob Goodlatte that creates a level playing field for brick and mortar and online stores,” Stitzel said, observing that Goodlatte's “simplified approach does not overburden micro businesses like Etsy sellers with compliance regulations.”

However, some consider advocacy for the Goodlatte solution as a tool to defer resolution of the online sales tax debate.

“I would argue on some level that the only people who are vocally supportive of the origin-based approach are those who have opposed finding a solution,” said Jason Brewer, senior vice president of Communications & Advocacy with the Retail Industry Leaders Association, noting that the associations involved in the South Dakota litigation “represent the companies that benefit from this loophole.”

“And so, to me, it's not a coincidence that they are supportive of the legislation that they know is not supported by the retail community and is not supported by state and local government,” he said, adding that the litigation “is more of a fig leaf for the fact that they aren't interested in this problem being solved.”

Unduly Burdensome

South Dakota's bill added to a growing body of laws reaching for remote retailers, fueling an intensifying rift between states and remote retailers—alongside opposing factions among retailers, principally split between remote sellers and local sellers (2016 Weekly State Tax Report 20, 4/1/16).

The weight, both financial and administrative, of state measures designed to topple Quill is often a core criticism surrounding efforts to expand remote retailers' nexus.

A statement released contemporaneously with NetChoice and the ACMA's complaint highlighted significant upfront costs that retailers would absorb in complying with various state regimes.

“Research by the TruST coalition estimates that a mid-market retailer collecting taxes for states and multiple taxing jurisdictions and definitions would spend $80,000-$290,000 in setup and integration costs and $57,500 to $260,000 in ongoing maintenance, updates, audits and service fees charged by ‘free' software providers,” according to the statement.

Likewise, Stitzel discussed how micro and smaller businesses, such as the Etsy retail community, may be encumbered by researching several state tax laws.

Closing E-commerce Break

Meanwhile, reports supporting laws capturing remote retailers are replete with the role of e-commerce in eroding states' sales tax base and oppressing local economies.

With information from a University of Tennessee study, the National Conference of State Legislatures estimated $23.3 billion in lost revenue in 2012 from uncollected tax on remote sales.

A 2013 report, co-authored by economist and former-Reagan advisor Arthur B. Laffer, found that e-fairness legislation could generate an increase of $563 billion in gross domestic product and 1.5 million new jobs by 2022.

For others, a micro-level analysis manifests a more poignant impact on local retailers facing a digital tax break that creates the perception of an online price advantage and drives business away from in-state shops.

Seeking a level playing field, retailers only seek fair competition on price and service, Brewer explained.

“We're not in the business of telling people how or where to shop,” he said. “We simply want government to take its thumb off the scale.”

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

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

For More Information

The South Dakota DOR statement is at http://src.bna.com/eTi.

The ACMA and NetChoice statement is at http://src.bna.com/eTq.

For a discussion of Congressional measures aimed at permitting states to tax remote vendors selling products on the Internet, see 1420-2nd T.M., Limitations on States' Jurisdiction to Impose Sales and Use Taxes, at 1420.06.E.8.