States Splitting on Digital Sales Tax Strategy

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Jennifer McLoughlin

States adopting revenue-recovery measures to capture untaxed remote sales aren’t uniform in their tactics or long-term targets.

During a March 21 panel at the Tax Executives Institute Inc.'s 67th Midyear Conference, Michael Fatale, deputy general counsel for the Massachusetts Department of Revenue, announced that there soon will be an administrative proposal addressing online sales taxation.

Massachusetts Gov. Charlie Baker (R) has proposed for the FY 2018 budget that remote retailers with $500,000 or more of annual sales in the state begin collecting a 6.25 percent sales and use tax.

Several states have adopted similar “economic nexus” regimes, where through administrative rule or statute, retailers satisfying a specified monetary threshold or volume of in-state sales must collect and remit sales tax. South Dakota and Alabama are already embroiled in litigation that state officials welcomed, aspiring to reach the U.S. Supreme Court and overturn a 25-year-old constraint on sales tax collection.

The case in states’ crosshairs is Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which forbids states from imposing sales and use tax collection obligations on sellers without a physical presence in-state.

However, Fatale said Massachusetts “would go at it differently than these other states.”

“Since that those states have taken the position that they aren’t recognizing Quill, Quill is no longer good law,” he said, explaining that Massachusetts’ approach is designed to be consistent with Quill. Fatale expects the administrative proposal will be released by the end of March.

Watching in Background

Other states are forging a different path, targeting “marketplace providers” with proposed measures imposing collection obligations on companies offering online platforms on which third-party retailers can peddle their wares. Prior efforts failed in New York and Washington, but both states have joined others by introducing bills this session that would hold marketplace providers liable for tax on sales facilitated through their platforms.

Texas appears to have jumped on this bandwagon with S.B. 1713 and H.B. 3875, filed March 9 and 10, respectively.

The bills provide that a marketplace provider “is not required to collect a use tax imposed under this subchapter that is due from a purchaser if the retailer for whom the marketplace provider facilitates the sale, lease, or rental collects the tax from the purchaser.” The bills further build in a presumption that a retailer registered with the Texas comptroller collects the use tax.

“I think the approach those bills are taking is to stay within the confines of Quill, and just look at the developments in the marketplace and the way companies are selling into our state to possibly pick up a few more sellers,” for purposes of sales tax collection and remittance, said Nancy Prosser, special counsel to the Texas Deputy Comptroller.

Prosser noted that Texas doesn’t have any “kill Quill” bills, adding that the agency’s position is to “watch in the background” and see what happens.

Brian Fliflet, deputy general counsel with the Illinois Department of Revenue, said that proposed legislation challenging Quill may surface in Illinois.

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

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

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