New Fronts Opening in States’ Fight Over E-Retailer Sales Tax

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By Chris Marr

Dec. 1 — States’ fight for the right to tax all e-commerce sales continues to find new battlegrounds, although tax attorneys say many of them might not directly confront the physical presence requirement that states hope to overturn.

From Florida to Ohio to Washington, recent state supreme court rulings addressed the nexus required to obligate companies to collect or pay various taxes.

The cases don’t directly challenge the Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota—establishing that states can only impose sales and use tax collection duties on companies with a physical presence there. But that won’t necessarily stop the parties involved from asking the Supreme Court to revisit Quill as part of their cases.

Doesn’t Apply to CAT

In Ohio, for example, the state supreme court ruled in three similar cases last month that out-of-state companies that reached a certain threshold of gross receipts were required to pay the state’s Commercial Activity Tax. The court held that the Quill physical presence standard didn’t apply to the CAT, a type of gross receipts tax.

“Obviously the nexus for the CAT is not the same as sales and use tax,” said Stephen Kranz, a tax attorney with McDermott Will & Emery who has testified before Congress on the issue of Quill and remote seller tax collections.

But, it is possible—if the Ohio taxpayers ask the U.S. Supreme Court to review their cases—that the state could cross-petition the court “to address the validity of Quill for sales and use tax,” Kranz told Bloomberg BNA Nov. 30. The state would be following the lead of Colorado’s revenue department, which cross-petitioned for a Quill review as part of the Brohl v. Direct Mktg. Ass’n case that is awaiting the court’s decision on whether it will grant review.

“Will Ohio take the same approach? We’ll have to wait and see,” Kranz said, noting a number of states have been pushing to get “a nexus case, if not the right nexus case” before the Supreme Court for a revisit of Quill.

Out of Place?

Matthew Schaefer, a tax attorney with Brann & Isaacson who is helping represent some of the Ohio taxpayers as well as the DMA, said he sees it as unlikely that the Supreme Court will accept an invitation to revisit Quill in cases that don’t confront it directly.

“The Ohio decisions made quite clear the court interprets the physical presence standard as being limited to sales and use taxes, not applying to gross receipts taxes,” Schaefer told Bloomberg BNA Nov. 30. The taxpayers in the Ohio cases— Crutchfield Corp., Newegg Inc., and Mason Cos.—haven’t decided yet whether to seek Supreme Court review, he said.

Likewise in the DMA case, Schaefer and his co-counsel have argued that Colorado was off base legally and procedurally to cross-petition for a review of Quill. In the case, DMA is opposing the reporting and notification requirements Colorado imposes on remote retailers, after the U.S. Court of Appeals for the Tenth Circuit upheld the requirement and said it didn’t violate the commerce clause.

“We believe the case presents important issues related to discrimination against interstate commerce. That’s the issue that should be before the court,” not the Quill physical presence standard, Schaefer said.

The DMA case is scheduled for conference Dec. 9, meaning the Supreme Court could reveal whether it will grant review a few days later.

Inverse Approach

Other nexus-related decisions of late include a case out of Florida, in which attorneys are inviting the U.S. Supreme Court to revisit Quill as part of an online florist’s dispute over state sales tax obligations.

American Business Corp., which has its headquarters in Florida, disputed the state’s sales tax obligations on orders delivered outside the state. The company keeps no inventory but forwards flower orders to local florists. Nevertheless, the Florida Supreme Court upheld the state’s florist tax regime in a May ruling.

The company’s attorneys petitioned the U.S. Supreme Court to review the case in an Oct. 24 filing, offering an inverse approach to the common criticisms of Quill‘s physical presence standard. Instead of arguing over a destination-based sales tax where the company lacks physical presence, the attorneys are arguing the Quill standard is unjust when the company’s offices are present, but the customers and the inventory itself are found in other states.

“The present case offers the Court an excellent opportunity to define the contours of state sales tax collection in the internet age,” the attorneys, led by Michael D. Sloan of Carlton Fields Jorden Burt P.A., wrote in the petition for review.

The Washington Supreme Court ruled against technology distributor Avnet on Nov. 23 in another nexus-related case. The court found Avnet’s in-state activities were sufficient to make the company liable for the state’s business and occupation tax on national and drop-shipped sales.

Avnet’s attorney in the case, Scott M. Edwards of Lane Powell in Seattle, declined to comment on the case.

‘Squarely’ Challenging Quill

It remains unclear whether a majority of the Supreme Court wants to revisit Quill, as many state tax officials are urging. If it does, it seems more likely to take a case that directly presents the physical presence standard in a sales tax matter, Kranz and Schaefer agreed.

“Of the cases pending now, the South Dakota litigation most squarely presents a challenge to the validity of Quill,” Kranz said, but added that the case would be in line behind DMA and the Ohio cases.

In South Dakota, companies and industry associations are contesting a tax law implemented earlier this year ( S.B. 106) that directly defies Quill by requiring out-of-state sellers to collect and remit sales tax if they sell more than $100,000 of goods into the state. The law imposes an economic nexus standard in place of Quill’s physical presence nexus.

In one of two pending cases there, the South Dakota Department of Revenue sued Wayfair Inc., Inc., and Newegg, asking for declaratory judgment that its requirement is valid. The retailers removed the matter to the U.S. District Court for the District of South Dakota.

Oral arguments have been set for Dec. 8 in the case, Schaefer said. The parties will argue two pending motions: the retailers’ motion for summary judgment and the state’s motion to remand the case back to state court.

Schaefer’s firm also is representing Newegg in a challenge to an Alabama Department of Revenue regulation ( Administrative Rule 810-6-2-.90.03) similar to South Dakota’s remote seller sales tax law ( Newegg, Inc. v. Ala., Dep’t of Revenue,). That case is pending at the Alabama Tax Tribunal, where the parties were due to file a status report and possibly a schedule for discovery on Dec. 2, Schaefer said.

To contact the reporter on this story: Chris Marr in Atlanta at

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

For More Information

Texts of the Ohio Supreme Court decisions are at , and

Text of the Washington Supreme Court decision is at

Text of the Florida online florist petition for Supreme Court review is at

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