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By Tripp Baltz
July 5 — More and more states are mounting efforts to capture remote sale taxes, and the top U.S. e-retailers and other remote sellers are faced with difficult—and often costly—choices about how to respond.
And they are confronting this dilemma in varied ways—reflecting the inconsistent attention they are receiving from states themselves.
Some are suing states to defend the U.S. Supreme Court's threshold rule for taxation in this area: Quill Corp. v. North Dakota, 504 U.S. 298 (1992) .
Under Quill, a seller must have an in-state physical presence before the state may mandate collection of sales and use tax.
Others are refusing to sell their products and services to customers in the increasing number of states challenging Quill (128 DTR J-1, 7/5/16).
Still others are “coming in from the cold,” in the words of state tax administrators, deciding that the costs of continuing to fight outweigh the costs of compliance with new laws and rules, even if they see them as unconstitutional.
Meanwhile, eager to take down Quill, some states are taking non-compliers to court. But the variation among the targeted companies is prompting questions.
For example, South Dakota in April sued four of the nation's top electronic commerce companies—Newegg Inc., Overstock.com Inc., Systemax Inc. and Wayfair LLC—after they failed to comply with the state's new law taking direct aim at Quill. Noticeably absent from the defendant list: Amazon.com Inc., the nation's No. 1 e-commerce company, which also doesn't remit taxes in South Dakota.
States lost an estimated $23.2 billion in 2012 from taxes due—but not paid—on online and catalog purchases, according to the National Conference of State Legislatures. Out-of-state companies cite the physical presence standard in Quill as relieving them of the obligation to collect and remit taxes. Customers are still required to pay the tax, but most don't.
Weary of waiting for Congress to craft a national solution, which it has shown little sign of doing, South Dakota and other states are increasing their efforts to eliminate Quill directly. Alabama and Tennessee recently passed regulations, too (128 DTR J-1, 7/5/16).
The South Dakota law, signed by Gov. Dennis Daugaard (R) March 22, requires out-of-state retailers who sell to state residents to register by April 25 with the state Department of Revenue and commit to comply with the law by May 1—regardless of whether they have a physical presence in the state (63 DTR H-1, 4/1/16).
The state initially identified 206 sellers lacking a physical presence in South Dakota that might meet the law's threshold of $100,000 in gross revenue from sales in the state and/or at least 200 separate sales.
When Newegg, which also has sued over Alabama's new administrative rule, Overstock, Systemax and Wayfair failed to comply, South Dakota sued. The state is seeking a declaration that it may compel out-of-state companies to collect and remit state sales tax on sales of tangible personal property and services for delivery into its borders. The state acknowledges that a declaration in its state's favor will require the abrogation of Quill.
The case, originally filed in state court, has since been moved to the U.S. District Court for the District of South Dakota. Systemax was dropped from the case after it started remitting sales taxes to the state (121 DTR H-1, 6/23/16).
South Dakota decided to sue the four initial defendants based on “information and analysis from the department, audits, public information and other activities,” Jonathan Harms, spokesman for the South Dakota Department of Revenue, told Bloomberg BNA June 28. The four companies “have made substantial transactions in the state of South Dakota.”
Harms added that he didn't know why Amazon wasn't sued.
Amazon spokeswoman Jill Kerr told Bloomberg BNA in June that the company has been refraining from commenting on the South Dakota case. She said the company strongly supports a federal solution to the state sales and use tax problem.
Amazon.com now remits sales taxes in 28 states, covering more than three-quarters of its customer base, Julie P. Magee, commissioner of the Alabama Department of Revenue, told Bloomberg BNA June 29. The online retailer announced recently that it will start remitting taxes to Alabama on Nov. 1, 2016. Alabama is also at the epicenter of the kill- Quill movement, passing an administrative rule that Newegg already has challenged in court (115 DTR H-1, 6/15/16).
“As a company, Amazon has said, ‘We're done with this, we're tired of it,' ” Magee said. “They want to put distribution centers in Alabama so they can have fast delivery of products to customers. They have to have distribution centers in the state to do that. We're seeing that now.”
Magee said more than 50 companies have registered with Alabama to remit since the state's Administrative Rule 810-6-2-.90.03 took effect Jan. 1. Approved Oct. 1, 2015, the rule requires out-of-state sellers with more than $250,000 of in-state annual sales to collect and remit sales tax (115 DTR H-1, 6/15/16).
Others topping the list of top U.S. e-retailers by annual sales aren't reacting as quietly to the flurry of state attention.
Overstock.com will vigorously defend itself in the South Dakota case, Mitch Edwards, acting chief executive officer of the Salt Lake City-based company, told Bloomberg BNA in a July 1 e-mail. “We have no physical presence in South Dakota, we have no employees, no stores, no warehouses, no nexus whatsoever,” he said.
Edwards said Overstock collects and remits sales and use taxes for sales in the four states where it has nexus, including Utah. “The audacity of South Dakota to sue us to force us to do their job of collecting and remitting sales tax will only hurt the fine people of South Dakota, who are all consumers,” he said. “This arrogant behavior on the part of short-sighted governmental officials should not be permitted to spread.”
After South Dakota filed suit, the American Catalog Mailers Association and NetChoice, trade associations for catalog and online retailers, sued the state, challenging the constitutionality of the new law (84 DTR K-2, 5/2/16).
Additionally, Seattle-based Blue Nile, a online jewelry seller, announced it would stop selling to customers in South Dakota, Josh Holland, spokesman for the company, told Bloomberg BNA in a July 1 e-mail.
Newegg, headquartered in City of Industry, Calif.; Wayfair, headquartered in Boston; and Systemax, headquartered in Port Washington, N.Y., didn't respond to multiple requests for comment.
One possible reason South Dakota sued the companies it did is that the state “was looking for easy targets,” Carl Szabo, senior policy counsel of NetChoice in Washington, D.C., told Bloomberg BNA June 29. “They didn't want to risk having a small online seller or a catalog seller as a defendant because they have a better case when they have a larger company. It misses the fact that catalog and small online sellers are just as implicated by this law as any other company. Big, small, medium-sized company—it doesn't matter, the constitution protects them all.”
George Isaacson of Brann & Isaacson in Lewiston, Maine, which represents the defendants in the South Dakota case, told Bloomberg BNA June 30 that South Dakota's claims amount to an “outrageous position for a state to take.”
The state is saying, “We are aware of existing Supreme Court precedent and the restrictions on state taxing power, but we are going to challenge constitutional law anyway,” he said. “It's unfair to these three companies which are operating within the constitutional protections afforded them. The very concept that states are free if they don't like precedent to disregard it in the hope the Supreme Court will merely reverse itself is destabilizing of the law.”
Isaacson said the companies are defending “well-established Supreme Court precedent,” including the Supreme Court's ruling in National Bellas Hess v. Dep't of Revenue, 386 U.S. 753 (1967), which held that the due process clause and the dormant commerce clause prohibit states from requiring out-of-state mail-order retailers that lack any physical presence within a state to collect that state's sales and use taxes on sales delivered to in-state residents.
In Quill, the nation's high court ruled 9-0 to uphold the “continuing value of a bright-line rule” in Bellas Hess and “the doctrine and principles of stare decisis.” The court said it would withhold its “hand, for now.” Justices Anthony Kennedy and Clarence Thomas are the only remaining members of the court who participated in that decision, though Kennedy has suggested recently that he may be willing to revisit the matter.
In particular, states and practitioners say a recent Supreme Court ruling could signal that the high court is ready to abrogate Quill. DMA v. Brohl I, a May 2015 decision that Thomas authored, remanded a challenge of a 2010 Colorado law requiring out-of-state sellers to report in-state sales to the revenue department and to notify customers of their obligation to pay taxes on remote purchases.
Kennedy concurred in the judgment, saying that the court may be willing to again consider whether “the time has come to renounce the bright-line test of Bellas Hess.” He said Quill was “now inflicting extreme harm and unfairness on the states,” in part because of the boom in e-commerce sales (35 DTR K-2, 2/23/16).
“When the court decided Quill, mail-order sales in the United States totaled $180 billion. But in 1992, the Internet was in its infancy. By 2009, e-commerce sales alone totaled $3.16 trillion per year in the United States,” he noted.
Kennedy said the “legal system should find an appropriate case for this court to reexamine” its rulings in Quill and Bellas Hess. “It is unwise to delay any longer a reconsideration of the Court's holding in Quill,” he said. “A case questionable even when decided, Quill now harms States to a degree far greater than could be anticipated earlier.”
The Kennedy concurrence “spurred us on, no doubt about it,” Magee told Bloomberg BNA in explaining why Alabama went forward with its new rule and has been openly inviting a lawsuit that would challenge Quill. “We don't want to be greedy, but as tax administrators, we want consistent treatment of all taxpayers. We collect taxes from bricks-and-mortar businesses, and we want the eBays of the world to pay, too.” EBay doesn't remit in Alabama, she said.
“We have state rules regulating flea markets. A flea market seller has to collect sales tax, they have to have a sales tax license with the state, the city and the county,” she said. “You use that same thinking, what's different about eBay, Airbnb, VRBO.com?” Magee said Airbnb Inc. is now remitting sales taxes in Alabama.
Indeed, the nature of business has changed, said Joe Huddleston, executive director for indirect tax with Ernst & Young LLP in Washington, D.C. “Many companies now want to deliver in a different fashion, and communicate with their customers in a different fashion,” he said. “They are taking action to comply with these new statutes voluntarily rather than find themselves in a litigation format.”
That includes complying with state mandates like Colorado's notice and reporting requirement, which many companies have found to be more onerous than using off-the-shelf tax software and remitting sales taxes. “A number of business have evaluated their overall practices and decided it's easier to comply than to fight,” Huddleston said.
Many states say they are acting because Congress has failed to respond to the high court's invitation to address the sales tax problem at the national level. Legislation has been introduced again this session, but has failed to move substantially (128 DTR J-1, 7/5/16).
Saying he was tired of waiting for a federal solution, Utah Sen. Curtis Bramble (R), president of the NCSL, in January urged states to pass laws and rules challenging Quill.
“If I were to describe what's going on in Congress with this on Twitter, I would file it under “#TooLate,” said Magee. “It's too late for some kind of national, one-stop solution. States are doing this on their own. Money is flowing into state budgets to be used to fund schools, build roads, repair bridges. When they started this congressional process, there was no money flowing in, and I think Congress still thinks states are getting the money. That's not the fact.”
“The tide has turned, and there's enough money coming in from these efforts we're undertaking that states would rather keep doing that rather than risk a federal solution that might dampen what's coming in,” she said. “Any kind of federal solution that interrupts these funds is going to be a problem for states.”
Some companies are now remitting because the online business model has changed, she said. “What people once did was price shop using the Internet, and not collecting taxes gave online retailers a competitive advantage,” she said. “Now the convenience of shopping online far exceeds the benefit of not paying what the tax is.”
States have been tacit in not wanting Congress “to wave a magic wand and give them the ability to tax across state borders,” Isaacson said. “There are 10,000 taxing jurisdictions in this country. What we need is rate simplification and administrative simplification, but states have said, ‘No' to that. They say, ‘That’s an infringement on our sovereignty; we want to be able to have our cake and eat it, too.' States want the authority to separately conduct audits. The Streamlined Sales Tax Project started with a very high-toned pursuit of greater standardization, but it eventually became the opposite of what it was intended to be.”
“States are adamant and shrill in their opposition to any attempt at uniformity,” he said. “They say 10,000 jurisdictions is the way they want to administer this. That's not Congress' fault, that's the states' fault.”
Isaacson said the NCSL strategy, of a “sort of multistate, multi-front assault on Quill,” will make it harder for e-commerce sellers to do business. “There will be companies that find that to be intimidating and will fold in the face of that pressure. If we think that is what government should do—ignore Supreme Court precedent and intimidate companies into compliance—then Bramble and the NCSL have come up with a good approach. Intimidating companies into compliance is hardly the way government should be going.”
The clarity and predictability of the Quill standard “has enabled the Internet and e-commerce to thrive in a predictable legal environment,” Edwards said. Efforts to overturn Quill “would throw the country back to a pre-Constitutional world where there are tollbooths at every state border,” he said. “Actually, at every county border! These efforts by revenue-hungry, wasteful and inefficient governmental agencies and taxing authorities stand the commerce clause of the Constitution on its head. They create a balkanized country of labyrinthine tax laws and jurisdictions that will crush small and medium-sized e-commerce sites.”
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