Sales Tax Slice: Will Justice Kennedy Have the Last Word on Physical Presence Nexus?

Nearly three years after Justice Anthony Kennedy stated in his Direct Marketing Association v. Brohl concurrence that “[t]he legal system should find an appropriate case for [SCOTUS] to reexamine Quill and Bellas Hess,” that case has been found in South Dakota v. Wayfair.

Following Kennedy’s invitation, a handful of states enacted economic nexus statutes that require no physical presence. The Court’s grant of certiorari in South Dakota v. Wayfair last Friday indicates that at least three other justices believe that the issue of whether the Constitution prohibits states from requiring retailers with no in-state presence to collect sales tax deserves another look. (The votes of at least four justices are required for the Court to grant certiorari.)

If the Court responds that no such prohibition exists, will online retailers and other interests have the clout to get Congress to reinstate the physical presence requirement, impose other nexus limitations, or curtail the compliance burden that would attend a loosened nexus standard?

A good indication of how vested various interests are in the decision’s outcome, and what their concerns are, may be found in the amicus briefs already filed in the case. For instance, in its brief, the Tea-Party-affiliated Americans for Tax Reform urges that that physical presence standard should be maintained and states that deferring to Congress on the issue is necessary to prevent “taxation without representation.” Americans for Tax Reform has also endorsed the No Regulation Without Representation Act, reintroduced by Rep. Jim Sensenbrenner (R-Wis.) last year, which would codify the physical presence nexus standard. 

Rep. Bob Goodlatte (R-Va.), in his brief, similarly expresses opposition to “‘regulation without representation,’” but has taken a different approach from the ATR-endorsed act. Goodlatte previously introduced the Online Sales Tax Simplification Act, which would adopt an origin sourcing method to taxing sales. Some have touted this approach as simplifying sales tax compliance by limiting collection and remittance responsibilities to the state of origin, while others have criticized that this approach would be vulnerable to planning to reduce or eliminate tax liability, Bloomberg Tax’s Jennifer McLoughlin has noted.

The concern of reducing the compliance burden has not been lost on proponents of the Marketplace Fairness Act. That legislation, which passed the Senate in 2013, would permit states to require remote sellers, with the exception of those with nationwide sales not exceeding $1 million annually, to collect and remit sales tax if the state is a member of the Streamlined Sales and Use Tax Agreement and adopts minimum simplification requirements relating to the administration of the tax, audits, and streamlined filing. According to the Streamlined Sales Tax Governing Board’s brief, 23 states already comply with the Agreement’s simplification requirements, and this has removed any undue burden on interstate commerce that would favor preserving the physical presence nexus requirement.

If SCOTUS overturns Quill and Bellas Hess and Congress does not respond by enacting additional requirements such as those contained in the Marketplace Fairness Act, it is not clear what incentive other states would have to ease compliance burdens.

Will SCOTUS overturn Quill and Bellas Hess? Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn.

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