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By Ryan Prete
The U.S. Solicitor General joined the chorus calling for the U.S. Supreme Court to upend a decades-old digital sales restriction that has sparked increasing upheaval among states seeking to capture revenue in the e-commerce economy.
Solicitor General Noel Francisco, a President Donald Trump appointee, filed during the last hours of March 5 a friend-of-the-court brief in South Dakota v. Wayfair. The case directly challenges the 1992 ruling in Quill Corp. v. North Dakota that prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.
The Solicitor General’s brief was among a wave of 16 submissions, several of which favor South Dakota’s argument that Quill is outdated in the modern digital marketplace. Others adopted a neutral position, only raising questions or considerations for the high court.
The Solicitor General argued that South Dakota’s digital tax statute is permissible under the dormant commerce clause and Quill shouldn’t extend to e-commerce—the Quill ruling specifically concerned the delivery of catalogs and didn’t envision “the rise of modern e-commerce.”
“The Court that decided Quill did not and could not anticipate the development of Internet commerce, through which an out-of-state retailer can establish a continuous and pervasive presence in a State even though it has no employees or physical property located there,” the brief stated.
The retailers in the case—Wayfair Inc., Overstock.com Inc. and Newegg Inc.—have until March 28 to file their brief on the merits, and supporters of the companies have until April 4 to file their friend-of-the-court briefs. Oral argument is scheduled for April 17, and practitioners expect a decision by late June.
The breif was lauded by Rep. Kristi Noem (R-S.D.)—the sponsor of the pending Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA)—which seeks to undo Quill.
“Rep. Noem is pleased to have the president’s support of a legislative solution to this issue,” Brittany Comins, Noem’s deputy chief of staff and communications director, told Bloomberg Tax.
Noem’s office previously told Bloomberg Tax that the RTPA needs be enacted before the Supreme Court hands down a decision.
The high court in Quill said Congress was best suited to resolve the issue of state taxation of online sales, but bills introduced over the years (including a handful in the current Congress) have languished without a floor vote.
Meanwhile, at the state level, there’s been a frenzy of activity this year, and in recent years, to adopt varying regimes to expand state tax collection authority over online sales, whether through notice-and-reporting laws, revised nexus thresholds based on sales figures, or the newest: laws placing collection duties on Amazon.com Inc.-type marketplace providers on behalf of third-party sellers on their platforms.
Max Behlke, director of budget and tax at the National Conference of State Legislatures, told Bloomberg Tax that the federal government wading into the topic “underscores how outdated the 1992 Quill decision is in 2018, and it is just the latest signal that the Supreme Court will rule in South Dakota’s favor.”
“While it is sad that Congress has not found the time in the 26 years since Quill to solve this ever-growing problem for states and for businesses, it’s a relief that at least one branch of the federal government is prepared to correct the problem,” Behlke said. “Hopefully, Congress will learn from this case that not addressing serious problems in the states is not a viable option going forward.”
The NCSL was among the parties represented in a March 2 brief filed by the State and Local Legal Center.
Joseph Bishop-Henchman, executive vice president of the Washington-based Tax Foundation—a group that filed a March 5 brief favoring none of the parties—told Bloomberg Tax the Solicitor General’s brief was very carefully written, “perhaps to give the Court some possible paths.”
“The brief says that Quill shouldn’t be ‘extended’ to online sellers, a clever recognition that technically it never has been,” he said.
Bishop-Henchman referenced the Trump administration’s consistent stance on digital sales tax collection.
“President Trump and Treasury Secretary Mnuchin haven’t spoken a lot on the issue but when they have, it’s been to say that online retailers should collect taxes,” he said.
On Feb. 15, speaking at a hearing before the House Ways and Means Committee, Mnuchin said he had spoken personally with Trump about online taxation, and that the president “does feel strongly” that sales tax should be applied to internet purchases.
And during a July 2017 hearing before the Senate Appropriations Subcommittee on Financial Services and General Government, Mnuchin said online sales taxation “is an issue that we’ve been looking at very carefully within the administration, and we expect to come out with a position shortly.”
Mnuchin also said he was “encouraged that Amazon is now charging tax, I believe, on their own sales but not the marketplace.” However, he added that he’s “not sure I understand the consistency on that.” Amazon is collecting taxes on its direct sales, but only has announced it’s collecting tax on third-party sales in Washington state and Pennsylvania.
Meanwhile, the Solicitor General further argued the Supreme Court should look to the 1970 decision in Pike v. Bruce Church, Inc. when considering the South Dakota case.
The Pike case rests on the theory that when a state regulates a business engaged in interstate commerce, incidental burdens on interstate commerce may be unavoidable, according to Jamie Yesnowitz, a principal and state and local tax practice and national tax office leader at Grant Thornton LLP.
Yesnowitz told Bloomberg Tax in an email that under the Pike ruling, the requirement to collect sales tax on digital transactions could be argued as a regulation that imposes constitutional incidental burdens on interstate commerce.
“Like South Dakota in its brief, the solicitor general is arguably understating the significant (and in some corners would be described as clearly excessive) burden that some remote sellers will face if collection and remittance in remote jurisdictions is required,” Yesnowitz said.
Joe W. Garrett Jr., deputy commissioner for the Alabama Department of Revenue, told Bloomberg Tax that Pike’s usage is “very interesting.”
“Forgive me for getting ahead of myself,” Garrett said. “But the biggest Wayfair question may not be who will win, rather it’s how the Court will go about overturning its physical presence rule and what will it leave in its place.”
Garrett said the Solicitor General’s brief “raises the possibility that a balancing test could replace physical presence where one state’s high-burden system could be subject to a higher nexus threshold than another state’s low burden system.”
Alabama is among the states that has changed their online sales tax laws to challenge Quill. And cases to do so are pending there, and in Indiana, Ohio, Tennessee, Virginia, and Wyoming. The DOR in Alabama has asked to stay the case pending the high court’s resolution of the Wayfair case.
The Solicitor General touched on the continuing debate over whether Congress or the high court should address the physical-presence standard—arguing that a new judicial precedent could enhance Congress’s ability to exercise its authority.
“Congress’s authority to legislate in this area should not dissuade the court from limiting or overuling Quill,” the brief stated.
A March 5 brief in support of South Dakota filed on behalf of four U.S. Senators—Heidi Heitkamp (D-N.D.), Lamar Alexander (R-Tenn.), Richard Durbin (D-Ill.), and Mike Enzi (R-Wyo.)—argued that despite 26 years of inaction, “Congress is fully prepared to act when needed” if states impose excessive burdens on out-of-state retailers following a theoretical expulsion of Quill.
Behlke waved off the brief, saying that should the high court undo Quill, further legislation would be useless.
“Detractors say that states will unleash burdensome regulations on remote sellers, which frankly is just not true,” Behlke said. “States don’t have the resources or appetite to make sales tax compliance burdensome. On the contrary, states want tax administration to be seamless because they are affected as well,” he added.
“The Senators are right in that Congress is the safeguard should sales tax administration become unwieldy at the state or local level, but there simply won’t be a need for legislation after Quill is overturned,” Behlke said.
However, other federal lawmakers are pushing for legislative movement before a potential June ruling.
Alongside Noem’s RTPA, the Marketplace Fairness Act of 2017 (S.976) (MFA), sponsored by Enzi, also seeks to kill Quill.
And Enzi’s office told Bloomberg Tax that while the senator supports the Supreme Court overturning Quill, he doesn’t believe that the court taking up the case removes Congress from the process.
“He still urges Congress to act on this in a bipartisan, bicameral basis to allow states and towns to collect the taxes they are owed and level the playing field for local businesses,” Enzi’s office said.
On the opposite end of the spectrum is the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA)—which would, in part, codify Quill’s physical-presence standard. The bill received a House Judiciary subcommittee hearing in July 2017, but hasn’t moved since then.
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