November Elections Likely Crucial In Remote Sales Tax Battle

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By Jennifer McLoughlin

Oct. 12 — States show no sign of retreating from their “kill Quill” agenda absent an uncertain, post-election congressional solution for the intensifying battle over remote sales taxation, according to leading tax practitioners.

The clash between states and remote retailers over cross-border transactions was at the top of state and local tax trends for 2016. States amplified an already growing campaign against the U.S. Supreme Court’s rule established in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which prohibits states from mandating sales tax collection from businesses without an in-state physical presence ( 128 DTR J-1, 7/5/16 ).

During an Oct. 11 panel that launched the 2016-17 D.C. Bar state and local tax lunch series, practitioners predicted that states won’t abort the battle. The resolve is due, in large part, to states’ increasing frustration with Congress, which for almost two decades has failed to articulate a new rule to reflect a digital marketplace not confined by state borders.

There is no guarantee of a congressional solution in a lame-duck session, but the November results may dictate when and how Congress ultimately fashions a new federal framework for taxing remote sales.

“Whatever is done in lame duck has to meet with some kind of cooperation in both chambers, which is why November 8th is critically important,” said Maureen Riehl, principal and counsel for MultiState Associates Inc., speaking on the prospects of several federal bills impacting states. “Because they’re either going to be ready to play. Or they’re going to be ready to hurt. Or they’re going to be really, take their marbles and walk away.”

Pending Digital Sales Legislation

Several federal remote sales proposals are pending at various stages:

  •  Marketplace Fairness Act (MFA) ( S. 698);
  •  Remote Transactions Parity Act (RTPA) ( H.R. 2775);
  •  No Regulation Without Representation Act ( H.R. 5893);
  •  Online Sales Simplification Act (OSSA) ( discussion draft).
Criticism has mounted over Rep. Robert W. Goodlatte’s (R-Va.) recently updated plan, which is a hybrid origin-based system that bases the taxation of remote purchases on the seller’s location, but at the tax rate of the consumer’s location. The Multistate Tax Commission recently released an analysis echoing the concerns of several states that consider the model unworkable ( 188 DTR H-2, 9/28/16 ).

From the audience, MTC Executive Director Greg Matson noted that Goodlatte’s regime doesn’t solve his primary concern—states regulating outside their borders—as it permits each state to impose its tax base on residents that don’t have a vote in the state. Thomas Shimkin, MTC legislative counsel and director, also questioned whether Goodlatte understands that the proposed definition of “origin state” undermines his principles—an “origin state” is defined as the state “in which the remote seller has physical presence and has employed the greatest average number of employees,” which may have no connection with a headquarter state.

Stephen P. Kranz, a Washington, D.C.-based partner with McDermott Will & Emery LLP, explained that while the current discussion draft fixed problems from prior iterations, complexities and wrinkles remain.

“There are some results that are inherent in the origin system that cannot be changed,” he said.

Describing the Judiciary Committee chairman’s proposal, Kranz estimated that Goodlatte’s framework could yield approximately 26 end results—factoring in the varying tax bases, tax rates, states not participating in the proposed clearinghouse and states with no sales tax.

Speaker Ryan Weighs In

Riehl noted that Goodlatte has held up competing remote sales proposals from reaching the House floor for a vote, including the RTPA. And she questioned whether the OSSA masks an underlying motivation to stymie progress on the issue.

“Is this all a ruse?” she said, questioning “who would come up with this as an alternative?”

Riehl explained that in September, Speaker Paul D. Ryan (R-Wis.) directed Goodlatte and Rep. Jason Chaffetz (R -Utah), who is the RTPA sponsor, to work out their differences. While there was no resolution before the October break, she said “there is some good faith effort trying to be made yet before the end of the Congress” to arrive at a deal between the two congressmen.

In the other chamber, Riehl said that leaders of the marketplace coalition and Senate leaders are discussing an alternative to the original MFA version—something that may resemble the Chaffetz bill. And while Senate Majority Leader Mitch McConnell (R-Ky.) promised to hold a 2016 vote on the MFA in exchange for Sen. Richard Durbin (D-Ill.) lifting objections to a vote on the permanent Internet Tax Freedom Act, it’s not clear if, when and how that may happen.

Ultimately, Riehl said that the bills may carry over into the next Congress. However, the question remains over “how long does anybody have the stomach to continue that,” particularly given the litigation over state regimes enforcing remote sales tax.

Anti-'Quill’ Campaign Continuing in 2017

In the meantime, states aren’t expected to back down from the anti- Quill movement.

Kranz anticipates that in in 2017, states will focus their legislative efforts on three primary models:

  •  Imposing economic nexus thresholds, similar to the South Dakota statute.
  •  Targeting marketplace providers, similar to earlier efforts that stalled in states, including New York and Washington.
  •  Requiring notice and reporting of in-state sales, similar to the Colorado statute, which is pending on a certiorari petition with the U.S. Supreme Court.

Kranz noted that while practitioners largely didn’t consider the ongoing Colorado litigation, Direct Mktg. Ass’n v. Brohl, as the proper vehicle to challenge Quill, a cross-petition filed last week by the state director of revenue requests that the U.S. Supreme Court assess the validity of the nearly 25-year-old decision. While this issue wasn’t decided by the lower courts, Kranz said that the dispute may end up being the case that re-litigates Quill in the near future.

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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