Four Possible Outcomes of Digital Sales Tax ‘Case of Millennium’

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By Ryan Prete

The U.S. Supreme Court is nearing a ruling in a case that could completely change the way states tax online commerce.

South Dakota v. Wayfair, a long-awaited direct challenge to the 1992 decision in Quill Corp. v. North Dakota, was argued April 17. Quill, which states for years have tried to “kill” through lawsuits and legislation, prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. A decision is expected by late June.

The case traveled to the highest court after e-retailers Wayfair Inc., Inc., and Newegg Inc. challenged South Dakota’s digital sales tax statute, S.B. 106 (S.D. Codified Laws Chapter 10-64), which the South Dakota Supreme Court last year found unconstitutional under Quill.

No one is certain how the U.S. Supreme Court justices will rule in what has been called the “tax case of the millennium,” but Bloomberg Tax analyzed four possible outcomes.

Court Overturns ‘Quill’

Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, told Bloomberg Tax that if the high court completely overturns Quill, Congress “could be forced to act.”

A blanketed reversal of Quill would mean that even one sale into a state would create a physical presence and require a retailer to collect and remit sales and use taxes.

Jennifer Karpchuk, state tax attorney at Chamberlain Hrdlicka in Philadelphia, agreed that a total reversal of Quill would push Congress to respond.

“This would be the most egregious outcome for small and medium-sized businesses,” Karpchuk told Bloomberg Tax. “The compliance costs would be huge, and the one transaction rule would pose serious risk of audit in all states.”

Max Behlke, director of budget and tax for the National Conference of State Legislatures, told Bloomberg Tax that while he thinks this outcome is unlikely, it would create a wave of uncertainty that rapid seller registration would alleviate.

“Every state needs to be prepared for a situation like this and follow the guidance of the Streamlined Sales Tax initiative,” Behlke said. “There needs to be call centers, states need to handle this correctly.”

Court Overturns ‘Quill’, Establishes Threshold

What if in reversing Quill, the court says that all states should follow South Dakota’s economic nexus threshold (200 transactions or annual in-state sales exceeding $100,000)?

Pomp said this outcome makes sense, but that “the hard part would be for the court to actually say why South Dakota’s law is reasonable. It might be easier for the court to just completely overturn Quill.”

Pomp said a lack of evidence in the case could bar the court from setting a threshold.

Karpchuk said there would be many underlying problems with a court-established threshold.

“When would this threshold start? How would business know exactly when they’ve hit this new collection obligation?” Karpchuk said. “South Dakota is a small-population state, so would the threshold shift for a more populated state like New York?”

Karpchuk said states with economic nexus thresholds should think about whether it might be worth amending their laws in the coming months.

Behlke said court-provided guidance would lead to nearly every state rushing to enact a law similar to South Dakota’s by next year.

Court Upholds ‘Quill’

If the high court upholds Quill‘s 26-year old precedent, sellers would likely face one or more of these state collection regimes:

  •  economic nexus models that impose sales tax collection duties on retailers that rise above a specified sales threshold;
  •  Colorado-style notice/reporting regimes that require retailers to alert customers to their tax liabilities;
  •  marketplace provider provisions that require Amazon-type sellers to collect sales tax on third-party transactions conducted on their platforms; and
  •  “cookie nexus” regulations, which require online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies.”
Behlke said he is certain that states will enact Washington- and Pennsylvania-style marketplace laws and Colorado-style reporting laws before anything else.

Karpchuk also said that states would “do whatever they can to secure lost revenue” if Quill is upheld.

“There would be a huge push from states for Congress to act through federal legislation. We’d also see a push from the Streamlined Sales Tax Initiative,” Karpchuk said.

Pomp agreed with Karpchuk and Behlke, adding that “we will also see more aggressive attempts to collect tax, like Massachusetts’s ‘cookie’ nexus law.”

Court Upholds ‘Quill’, But Pressures Congress

Sen. Mike Enzi (R-Wyo.) addressed an audience May 2 at the Streamlined Sales Tax Governing Board’s semiannual meeting to, in part, discuss the April 17 oral argument in South Dakota v. Wayfair.

“The worst-case scenario here is that the court doesn’t overturn Quill,” Enzi said. “But if they don’t, then I think they’ll put pressure on Congress to act, more pressure than Congress has ever seen under this topic.”

Enzi said he believes the court “will advance our cause,” but the notion of the court pressuring Congress to act seems unlikely to Karpchuk.

“I’m just not sure how they can push Congress besides verbally stating how they should act,” Karpchuk said. “Justice Sotomayor addressed this issue of getting Congress to act. It would be hard for the justices to use any evidence in a push for congressional action. There’s no clear-cut facts here, and no real idea of compliance costs, which in part frustrated Justice Breyer.”

Behlke said he isn’t sure what more the Court could do to urge Congress to act.

“The Court can’t pressure Congress more than they already did in 1992. I have no idea what this type of ‘pressure’ would look like.”

No Movement on The Hill

While largely unsuccessful, federal legislation to both codify and overturn Quill is currently active.

Rep. Kristi Noem (R-S.D.) is the sponsor of the Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA)—which seeks to undo Quill.

Alongside the RTPA is the the Marketplace Fairness Act of 2017 (S.976) (MFA), sponsored by Enzi. The bill also seeks to kill Quill, and, like the RTPA, it has seen no movement.

On the opposite end of the spectrum is the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA), sponsored by Rep. Jim Sensenbrenner (R-Wis.)—which would, in part, codify Quill’s physical-presence standard. The bill received a House Judiciary subcommittee hearing in July 2017, but hasn’t moved since then.

The leadership of the House Judiciary Committee is also a frequent topic of discussion surrounding digital sales tax legislation. The committee is currently chaired by Rep. Robert W. Goodlatte (R-Va.), a lawmaker often considered by members in the state and local tax community as the biggest hurdle to e-commerce reform. Goodlatte announced he will retire in November.

To contact the reporter on this story: Ryan Prete in Washington at

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

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