High Court Digital Tax Case Reignites Compliance Cost Debate

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By Ryan Prete

A potential U.S. Supreme Court decision undoing a 26-year-old sales tax restriction could subject online retailers to thousands of taxing jurisdictions—and practitioners differ over whether technology could facilitate tax collection and ease sellers’ compliance burdens.

At issue is the 1992 ruling in Quill Corp. v. North Dakota, which prohibits states from imposing tax collection obligations on vendors without a physical presence in-state.

Heeding calls from traditional retailers and dozens of states, the high court granted review Jan. 12 of South Dakota’s contention that Quill is obsolete in the e-commerce era and should be overturned. The case arises from the lower state supreme court’s decision invalidating the state’s digital sales tax statute S.B. 106 (S.D. Codified Laws Chapter 10-64) as unconstitutional under Quill.

“If we overturn Quill, will we then face a crazy situation where each state applies their own individual and varying threshold for which businesses would then need to collect and remit taxes?” Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, told Bloomberg Tax. “If that happens, we will just be where we were before, with taxpayers pushing for the protections currently offered under Quill.

Retailers already have to track a jumble of state statutes and regulations attempting to capture taxes lost to online sales. These include South Dakota-style economic nexus thresholds, Colorado-style notice and reporting requirements, and collection duties for Amazon.com Inc.-type marketplace providers on third-party marketplace sales.

However, the modification or termination of Quill could unleash a flurry of new laws and regulations that bury retailers and increase companies’ compliance costs for collecting and remitting taxes on online purchases.

There currently are avenues for sellers to comply, including numerous software-based systems and the Streamlined Sales Tax Program—through which sellers collect tax voluntarily and remit to the 24 state participants, which cover the filing costs and other fees. But tax professionals and trade group leaders debate the true cost, usefulness, and longevity of these services should the Supreme Court undo Quill.

Patchwork of Regimes

Taxpayers face a growing patchwork of state standards when it comes to remote sales taxes. According to MultiState Associates Inc., 34 states introduced 81 pieces of legislation during 2017 to recover revenue from digital commerce. Key developments in 2017 included:

  •  Nearly twenty states pursued economic nexus models through administrative rule or statute, seeking sales tax collection from retailers satisfying a specified threshold of sales. Several enacted laws, including Indiana, Maine, Wyoming and North Dakota—although the latter two states currently aren’t enforcing their laws. And many states are engaged in litigation over their regimes.
  •  Minnesota adopted a first-of-its-kind law requiring Amazon-type marketplace providers to collect sales tax on third-party marketplace transactions. Washington and Rhode Island soon followed.
  •  Massachusetts released its “cookie nexus” regulation, which requires online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies.”
Several states also have followed Colorado’s lead with its 2010 notice and reporting statute, which the the U.S. Court of Appeals for the Tenth Circuit upheld as constitutional. Louisiana, Pennsylvania, Rhode Island, Vermont, and Washington have adopted similar laws.

Post-'Quill’ Issues?

However, overturning Quill could present major issues for taxpayers, according to Pomp. He said that a uniform law establishing an in-state sales threshold triggering retailers’ tax collection obligations would be both beneficial and simplistic for states and businesses.

Pomp said it’s extremely rare for the justices to submit recommendations to states. Still, he said the court could hand down a decision that sets forth guidelines for states—including a recommended sales threshold that would exempt small businesses from any new tax collection obligations.

Craig Johnson, executive director of the Streamlined Sales Tax Governing Board Inc. (SSTGB), told Bloomberg Tax that “If sellers can take the time to start complying with the states where they do business, they could save a lot of time if Quill were to be overturned.”

Certified Service Providers

Scott Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara Inc., told Bloomberg Tax there are four basic tasks that all sellers need to understand how to complete—especially if the high court modifies or completely scraps Quill:

  •  what’s taxable and what’s exempt in a state;
  •  a state’s sales tax rate;
  •  how to file a return in a state; and
  •  how to submit a payment to a state.
“The capacity needed to comply with sales and use tax collection is so much smaller than it once was in 1992,” Peterson said. He noted that Avalara, which provides automated tax software, targets small- and medium-sized business and has a team that targets what he called “single-owner home offices,” which he classified as the smallest of sellers.

Avalara is also one of the Certified Service Providers (CSP) working with sellers in the Streamlined Sales Tax Initiative (SST). Under the SST, sellers are set up with a CSP—software companies with which sellers establish an agreement to begin collecting tax. More than 3,700 businesses are enlisted in SST, according to Johnson.

“A business can begin collecting and remitting in 24 states in one swoop by signing up with SST, and without a cost,” Johnson said.

Puppy Metaphor

However, not everyone is convinced that the STT or software can ease tax collection burdens for sellers.

“Let’s assume the software can look up states’ sales tax rates and pay that rate. Let’s also assume states can pay for sellers to use the software. Neither of these components make it easier for businesses to maintain this free software,” Steve DelBianco, president and CEO of NetChoice, a Washington-based internet commerce trade association, told Bloomberg Tax. NetChoice is leading most of the legal challenges against the “kill Quill” movement, and filed a friend-of-the-court brief that opposed Supreme Court review in the South Dakota dispute.

DelBianco compared tax compliance software to a new puppy.

“This software is free the way a puppy is free,” DelBianco said. “It seems free when you first bring it home, but it’ll end up costing you a fortune to maintain.”

DelBianco said that while tax compliance software may appear free—in regards to SST cooperation—or seem moderately priced, there are significant issues that could cost sellers both customers and valuable time.

Characterization Complications

For example, DelBianco said a scarf could be classified as clothing in a state—and therefore potentially exempt from sales tax—or classified as an accessory—and therefore subject to sales tax. If sellers make an error in classifying the item, they’re subject to a penalty. The CSP isn’t at fault.

Issues with characterization occur most often with medical products and clothing, DelBianco said.

“This is a lot of research for the seller to conduct, and if they’re doing business in all 46 states with a sales tax, well then the time needed to research goes up by 46 times,” DelBianco said.

Johnson partially refuted DelBianco’s claim, stating that each participating SST seller signs a unique contract with its CSP, so fault may not fall on the seller every time if the parties agree upon terms.

Future of Streamline?

Peterson thinks participation in the Streamlined Sales Tax Initiative could decrease if Quill is modified or overturned.

“It would be less of a reason for people to volunteer in the program if they are already legally mandated to collect and remit,” Peterson said.

Johnson, however, said participation in the program could rise, even if Quill is scrapped.

“Sellers and states have confidence in our program, and while there are other cost-effective programs for states not a part of SST, the value of uniformity is strong,” he said.

Johnson also said he is confident that if the Supreme Court declares South Dakota’s law constitutional, that SST member states would keep offering their services to sellers.

Potential Outcomes

However, DelBianco said Congress controls interstate commerce and expects the high court will ultimately respect the constitution in its decision.

Jamie Yesnowitz, a principal and national tax office leader at Grant Thornton LLP, said he doesn’t believe the high court will declare South Dakota’s law unconstitutional, because it would’ve “done that already.”

“It seems that the court is likely to come to a resolution of what Quill really is,” Yesnowitz said during a Jan. 17 webinar. He said there could be a final decision as early as June.

“If the court says South Dakota’s statute is good law, I would expect other states to follow it,” Yesnowitz said. “However, the court could change the standards of Quill or say that Congress has to ultimately answer the question.”

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

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

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