Tax Lawyers Harbor Doubts Over High Court Taking Digital Tax Case

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 Laura Mahoney and Ryan Prete

States shouldn’t rely on the U.S. Supreme Court wading into the issue of states’ taxing authority over remote retailers when they can find alternative approaches to capture tax on out-of-state sales, according to leading state and local tax practitioners.

“I’m giddy over Quill, and have joked that the Supreme Court should take it up just so we can stop talking about it at all these conferences,” Richard D. Pomp, the Alva P. Loiselle professor at the University of Connecticut School of Law, said during a Nov. 8 panel at the Paul J. Hartman State & Local Tax Forum in Nashville, Tenn.

Pomp told the audience that he really isn’t sure if the high court will take up South Dakota’s petition for review of a Sept. 13 state Supreme Court ruling that found the state’s “economic nexus” law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), unconstitutional under Quill Corp. v. North Dakota—the 1992 U.S. Supreme Court ruling that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. Several federal lawmakers, interest groups and dozens of state attorneys have filed friend-of-the-court briefs urging the Supreme Court to accept the South Dakota case ( South Dakota v. Wayfair, Inc., U.S., No. 17-494, friend-of-the-court briefs filed 11/2/17 ).

Pomp said that individual states share the capacity and resources to fight the current precedent.

“This frontal attack on Quill is misguided. Why is everyone focused on the Supreme Court when the states can finds ways around it with lawyers?” Pomp asked, citing Massachusetts, which is mandating online vendors collect state sales tax if they have property interests in or use in-state apps and “cookies.”

Massachusetts regulation 830 CMR 64H.1.7, which took effect Oct. 1, also requires internet vendors to collect sales tax if they make 100 or more individual transactions and exceed $500,000 worth of in-state sales in a year. Crutchfield Corp. filed suit Oct. 24 in Virginia Court challenging the regulation. However, the Massachusetts DOR has said its regulation isn’t a “kill- Quill” measure. And other states have considered and adopted both direct and indirect approaches to dealing with Quill—a movement that isn’t likely to slow down, according to practitioners at an earlier California tax conference.

‘800-Pound Gorilla’

Jordan Goodman, co-chair of the State and Local Tax Group at Horwood Marcus & Berk Chartered, is more absolute when predicting Quill‘s future.

“I’m going on record here saying the Court does not grant cert,” he said during the Nov. 8 panel. “This would be the third time they would hear the issue. I don’t see it happening.”

Goodman argued that instead of states fueling their “kill- Quill” arguments with “times have changed” rhetoric, they should instead advance by interpreting current laws in a new light.

He told attendees that states must “adapt or die” to laws surrounding the collection of remote sales tax and shined a spotlight on Washington, Minnesota, and Rhode Island, states that require collection of sales tax from third-party marketplace sales.

“It should be the marketplace sellers collecting. They’re the 800-pound gorillas in the room,” Goodman said.

Taxpayer Choice

During a Nov. 3 session at the 2017 Annual Meeting of the California Tax Bar and the California Tax Policy Conference, panelists said that states aren’t easing up on their efforts to work around the 25-year-old Quill restriction. And they told attendees that taxpayers can choose between giving in or litigating if they believe states have overstepped their authority.

Carl Joseph, principal with Ernst & Young LLP, in Roseville, Calif., said that only a few states have enacted laws or regulations that are direct challenges to Quill. Alongside South Dakota’s dispute, similar “kill- Quill” cases are pending in four other states—Alabama, Indiana, Tennessee and Wyoming. However, he noted that a coalition of 35 states and the District of Columbia have joined the chorus calling for the U.S. Supreme Court to take up the South Dakota case.

Other states have enacted guidance and regulations to pursue nexus indirectly, most recently focusing on nexus created through marketplace providers such as Inc. that fulfill orders on their platforms for other sellers.

“I don’t see the states backing off on this,” Joseph said. “They’re going to keep coming up with ideas and sidestepping” Quill to get what they want.

The different models that states are floating all point in the same direction—collecting and remitting tax on sales in various states is inevitable, Jeff Graybill, tax counsel at the California Department of Tax and Fee Administration, told attendees.

“The sense is that the writing is on the wall and they might as well start collecting and reporting,” Graybill said.

‘Firmer Ground’

When it comes to income tax, states are increasingly setting thresholds for sales, property, or payroll into a state that trigger economic presence nexus. They are on firmer ground with these approaches, Joseph and Graybill said.

States are on thinner ice as they focus on passive investors and look-through entities that would have no reason to know they are doing business in California, Joseph said.

“All states are trying to be aggressive about this and getting their piece of market activity,” Joseph said. “They need to be conscious of going too far and letting constitutional issues get in the way. I think there will be some slide back from the courts.”

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at and Ryan Prete in Nashville, Tenn., at

To contact the editor responsible for this story: Cheryl Saenz at

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