Sales Tax Slice: Killing Quill with Kindness—Can Voluntary Collection Provisions Help States Overcome the Nexus Quandary?

“You can catch more flies with honey than with vinegar,” the old saying goes. But try telling that to states feeling constrained by the limitations placed on their ability to require out-of-state sellers to collect their sales tax, and watching millions in revenue go uncollected each year. Some states have decided to aggressively challenge the physical presence standard upheld in the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. States are enacting so-called, “kill Quill” bills that assert state authority over out-of-state retailers by imposing sales tax collection obligations on remote vendors when their sales in the state reach a certain dollar and/or transaction threshold.

States’ Approaches

South Dakota is the most recent state to join the movement, setting pretty low thresholds for remote sellers -- $100,000 in annual sales or 200 separate transactions. The goal behind these kinds of bills, it seems, is to force either the high Court or Congress to provide a federal solution to the nexus debate once and for all. Both South Dakota’s revenue department and groups representing the business community have filed lawsuits seeking a decision on the constitutionality of South Dakota’s bill, enacted just shy of two months ago. (See the article by Bloomberg BNA’s Jennifer McLoughlin titled, ‘Quill’ Cases Goading Congress on Remote Nexus, Sellers Hope.) 

Meanwhile, some states appear to be taking a kinder, less confrontational approach to sellers who make sales to in-state purchasers, but who have no obligation to collect tax under current constitutional standards. States like Oklahoma have adopted voluntary tax collection measures hoping, perhaps, to gently induce remote retailers to collect the state’s sales and use tax. The state’s Retail Protection Act of 2016, approved by Governor Mary Fallin this past Tuesday, amends the sales and use tax provisions authorizing and directing the Oklahoma Tax Commission to establish an initiative for out-of-state retailers to register, collect, and remit Oklahoma sales and use tax on its retail sales to in-state customers. Eligible retailers who register under the initiative by May 1, 2017, are protected from assessment, penalties, and interest for previously uncollected tax. (So you don’t get the idea that the legislation is without some bite, the act does require out-of-state vendors, registered or not, to notify each Oklahoma customer of his or her total purchases and of the customer’s potential use tax liability.)

Since 2014, Utah has offered special vendor collection discounts to remote sellers who voluntarily collect and remit the state’s sales and use tax. Volunteer vendors may retain 18 percent of the amount of tax collected on their sales to Utah customers. The special vendor discount will disappear, however, if the Supreme Court issues a decision or Congress passes a law requiring out-of-state sellers to collect and remit state sales taxes.

Even as Alabama state officials vociferously declared last year their desire to precipitate a lawsuit that will take Quill back to the Supreme Court (see Bloomberg BNA’s Daily Tax Report to check out Chris Marr’s December 2015 article, Alabama Remote Seller Rule Awaits Challenge, Likely In 2016), the state also adopted the Simplified Seller Use Tax Remittance Act, allowing out-of-state sellers having no physical presence in the state to voluntarily register, collect, and remit a simple 8 percent tax on their sales to Alabama purchasers, without having to calculate tax rates for the numerous cities and counties that also impose sales tax.

It remains to be seen whether states are likely to see a rise in remote sellers collecting the sales tax by using kind methods or by taking a not-so-nice approach. But, maybe those using honey instead of vinegar feel a just a little bit better about themselves. Maybe.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does it matter from a policy or practical perspective what approach states take to encourage remote seller sales tax collection?

Take a free trial to Premier State Tax Library , a comprehensive research service that delivers deep, unique analysis, and time-saving practice tools to help practitioners make well-informed decisions.

By René Y. Blocker