Digital Sales Tax: Hit and Miss in States

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By Jennifer McLoughlin

States’ collective agenda to rope in lost revenue from remote sales has yielded mixed results so far in 2017.

States have in their sights not only untaxed sales through the digital marketplace, but also a U.S. Supreme Court decision curbing their sales tax authority over out-of-state sellers— Quill Corp. v. North Dakota, 504 U.S. 298 (1992), prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state.

In a 2015 concurrence, Justice Anthony Kennedy suggested the Quill restraint is antiquated alongside technological advancements and changing consumer habits. States answered Kennedy’s invitation for a case to reassess the 25-year-old rule, with Alabama spearheading the charge in 2015 through adoption of an economic presence model—requiring sales tax collection from out-of-state sellers satisfying a specified monetary threshold or volume of in-state sales.

Since then, states have explored various means to recover revenue, and in some cases, join the “kill Quill” movement that is gaining steam.

However, while many lawmakers have appeared eager to implement a state-specific fix, many proposals haven’t made it through the legislatures. But with Congress stuck in what seems like a perpetual holding pattern on the issue, states won’t abandon the search for tools to stem eroding sales tax bases and urge the Supreme Court to nullify the Quill rule.

Internal Politics

Nearly 20 states, through administrative rule or statute, have pushed for economic nexus standards this year. Bills in Arkansas, Georgia, Mississippi and Utah have died this legislative session—a New Mexico measure is potentially heading to a special session after both chambers approved, but Gov. Susanna Martinez (R) voiced opposition.

However, internal politics—rather than policy considerations—have played a role in obstructing several bills from becoming law, according to Max Behlke, director of budget and tax policy at the National Conference of State Legislatures. And some may be watching and waiting for the outcome in those states that have taken the lead, such as South Dakota.

“States that have large budget gaps are much more apt to do it,” he said. “Necessity breeds action.”

Moving Forward

The North Dakota Legislature has approved S.B. 2298, which would require sellers without an in-state physical footprint to collect and remit sales tax if their annual sales in the state exceed $100,000 or amount to 200 or more separate transactions. Sen. Dwight Cook (R), sponsor of the bill, told Bloomberg BNA that he expects Gov. Doug Burgum (R) to sign off on the measure.

The North Dakota bill mirrors a South Dakota statute enacted in 2016 that has reached the South Dakota Supreme Court after a lower circuit court ruled the law unconstitutional March 6. South Dakota lawmakers crafted the law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), as a vehicle to undo Quill.

If approved by the governor, North Dakota’s law might not see a courtroom. As amended, S.B. 2298 has an effective date contingent on the Supreme Court overturning Quill or “otherwise confirming a state may constitutionally impose its sales or use tax upon an out-of-state seller in circumstances similar to those specified” in the bill.

Wyoming’s H.B. 19, which Gov. Matt Mead (R) signed March 1, could soon prompt another lawsuit. However, given it also incorporates the $100,000/200 transactions threshold, opponents might defer a challenge pending the South Dakota litigation.

“It’s important as it shows another state is doing this,” and it adds to the arguments persuading Supreme Court review, Behlke explained. “But it’s not new or novel, because it was done the year before.”

Regulatory Efforts

Like South Dakota, Alabama and Tennessee are also hosting challenges over their economic nexus regimes. Rather than through statutory measures, however, the states have pushed through with administrative rulemaking.

On April 3, Massachusetts followed suit by releasing Directive 17-1, which requires sales tax collection from out-of-state internet vendors with annual in-state sales exceeding $500,000 and sales for in-state delivery in 100 or more transactions.

According to the directive, Quill specifically intended to reaffirm a prior case “in the context of a fact pattern pertaining to a mail order vendor.”

Quill made clear that the determination of the existence of a vendor’s in-state physical presence is to be evaluated on a case by case basis,” according to the directive, which distinguishes the business and activities of internet vendors from those of mail order vendors. “Also, Quill made clear that this determination is to be informed by the Supreme Court’s precedent, and that physical presence includes the situation where a vendor owns, leases or licenses in-state property, or relies upon one or more in-state representatives ‘to establish and maintain a market’ in the state for its sale.”

The Massachusetts Department of Revenue finds that an internet vendor falls within Quill’s physical presence standard through the ownership and use of in-state vendor software and cookies, as well as utilization of content distribution networks and in-state representatives such as online marketplaces.

Complying with ‘Quill’?

During a March 21 panel at a Tax Executives Institute Inc. event, Michael Fatale, deputy general counsel for the Massachusetts DOR, announced that an administrative proposal addressing online sales taxation was expected shortly. He said that Massachusetts “would go at it differently than these other states,” including South Dakota and Alabama.

“Since that those states have taken the position that they aren’t recognizing Quill, Quill is no longer good law,” he said, explaining that Massachusetts’ approach is designed to be consistent with Quill.

However, many don’t view the directive as Quill-compliant.

“Massachusetts DoR is being too clever by half,” said Steve DelBianco, executive director of NetChoice, which is a party in the South Dakota and Tennessee litigation. “The U.S. Supreme Court said that an out-of-state seller who mailed ‘an avalanche’ of catalogs into North Dakota could not be forced to pay the state’s sales tax. So how in the world can Massachusetts deny that this ruling applies to e-retailers, who merely post a website that a Massachusetts consumer decides to pull-down into their browser?”

“Hopefully, state lawmakers will realize this DoR directive is headed in the wrong direction, by inviting lawsuits while bringing in no new tax revenue,” DelBianco told Bloomberg BNA by email.

Alternative Approach

In the wake of the U.S. Supreme Court turning down an appeal challenging Colorado’s 2010 notice and reporting regime, many anticipate states will regard the ruling as carte blanche to adopt similar statutes ( Direct Mktg. Ass’n v. Brohl , 2016 BL 411370, 137 S. Ct. 591, 196 L. Ed. 2d 473, U.S., No. 16-267, certiorari petition denied 12/12/16 ). The U.S. Court of Appeals for the Tenth Circuit ruled the Colorado law constitutional in February 2016.

The Colorado statute (Colo. Rev. Stat. § 39-21-112.3.5) requires select remote retailers not collecting sales tax to report in-state sales to the Department of Revenue—including consumer names, shipping addresses, billing addresses and total amounts—and notify customers of their use tax obligations.

Through S.B. 238, opponents of the legislation are attempting to repeal what they term the “tattle-tale” reporting provisions of the law. The bill would leave in place the requirement that covered retailers provide notice to consumers about their obligation to pay taxes on products purchased via electronic commerce.

In the meantime, many states have followed Colorado’s lead. During the 2017 legislative session, at least 10 states have proposed notice and reporting regimes. Some only require consumer notification, while others incorporate reporting requirements—and select proposals mandate the notice and reporting requirements where a covered retailer fails to abide under economic nexus models.

Alabama Gov. Robert Bentley (R) on March 22 signed into law S.B. 86, enacted as Act No. 2017-82, which authorizes the state’s Department of Revenue to require out-of-state sellers to report their sales to the department and notify Alabama customers of their tax obligations.

Marking Marketplace Platforms

Other states are forging a different path, targeting “marketplace providers” with proposed measures imposing collection obligations on companies offering online platforms on which third-party retailers can peddle their wares. Behlke said that marketplace provider measures—what he believes is the “last frontier"—are among the most important bills to watch this year.

Prior efforts failed in New York and Washington, but both states have joined others by introducing proposals this session that would hold marketplace providers liable for tax on sales facilitated through their platforms. Reports indicate the New York measure is dead—but practitioners have told Bloomberg BNA that bills may have legs in other states, including Minnesota, Rhode Island, Texas and Washington.

Where Is Congress?

In the meantime, hopes for congressional action are dimming.

Several competing proposals have surfaced, but stalled, in Congress through the years. Both the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA), which authorize states to mandate remote sales tax collection under certain conditions, haven’t reached the House for a vote. Other proposals floated include:

Congress has shown no signs of forming a national framework for digital sales taxation this legislative session. Federal lawmakers are wading through a quagmire of investigations, a potential government shutdown, and disputes over health care reform and federal tax reform—and with Senate Republicans triggering the “nuclear option” in altering rules to confirm Judge Neil M. Gorsuch for the high court, increasing acrimony between the parties will likely further complicate resolution on any issue.

Digital sales taxation “is about number 80 on the list of issues to tackle,” Behlke said. He further noted that he doesn’t expect any congressional movement on the issue until a case is on the doorsteps of the Supreme Court with a petition for review.

To contact the reporter on this story: Jennifer McLoughlin in Washington at

To contact the editor responsible for this story: Ryan C. Tuck at

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