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By Ryan Prete
State tax watchers aren’t convinced that online retailers will persuade the U.S. Supreme Court to bypass a digital sales tax dispute with the argument that reporting and notice statutes provide states the “tools” to collect remote sales tax.
“The states have tools to increase consumer use tax collection,” e-commerce companies Wayfair Inc., Overstock.com Inc., and Newegg Inc. argued in a Dec. 7 brief in opposition. The companies want the high court to deny South Dakota Attorney General Marty Jackley’s (R) request for review of a 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 Supreme Court ruling that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state.
The retailers argue that the foundational criticism of Quill—that the law prevents collection of taxes from remote sales—is faulty. In February 2016, the U.S. Court of Appeals for the Tenth Circuit upheld as constitutional a 2010 Colorado law requiring out-of-state sellers that don’t collect sales and use tax to (1) notify buyers at the time of transaction that tax isn’t being collected but may be due, (2) provide consumers an annual report of their purchases, and (3) send an annual report to the state showing total dollar amount of each buyer’s purchases.
“As a result, notice and reporting laws have given the states ‘new tools for improving consumer-based use tax compliance,’” according to the retailers’ brief. They further noted that after the Tenth Circuit’s holding, several states followed Colorado’s lead by adopting similar laws, including Louisiana, Pennsylvania, Rhode Island, Vermont, and Washington.
However, some organizations that filed friend-of-the-court briefs supporting the online retailers’ opposition aren’t promoting reporting laws as a solution in the Quill battle. And practitioners question whether the Supreme Court will find the online retailers’ opposition compelling.
Andrew Moylan, executive vice president for the National Taxpayers Union Foundation—which filed a friend-of-the-court brief supporting the online retailers—said that while he agrees that states have tools at their disposal, he is concerned with the privacy and data security issues with laws similar to Colorado’s regime.
“Requiring purchase information to be reported to the state can reveal very sensitive personal details about someone’s life,” Moylan told Bloomberg Tax, arguing that states have other legal avenues to pursue “legally owed” tax revenue. “For example, they could increase audit and enforcement actions to bring compliance rates up,” he said.
Moylan noted that South Dakota’s pursuit of its “economic nexus” law shows “how aggressive they are in attempting to seize new powers to tax interstate commerce.”
Katie McAuliffe, federal affairs manager for Americans for Tax Reform, which also filed a brief favoring the retailers’ opposition, likewise doesn’t back reporting laws.
“I’m not a fan of the tattle-tale tax,” she told Bloomberg Tax. “I think it is a privacy violation to report a person’s purchases to the state. States could enforce their use taxes, but they choose not to because it would be unpopular. Once customers in Colorado get their first taste of how the tattle tale tax actually functions, I think there will be significant push back.”
Joe W. Garrett Jr., deputy commissioner of revenue with the Alabama Department of Revenue, told Bloomberg Tax in an email that while there is some truth that states have tools to pursue use tax collection, the opposition brief misses the larger point.
“Does it make sense that the commerce clause allows states to require Wayfair to report but does not allow states to require Wayfair to collect and remit? Why? That inconsistency illustrates the nonsense of Quill. Having the seller report and the states collect from consumers is a much more burdensome system to the economy than the much simpler regular system where the seller collects and remits,” Garrett said.
Garrett argued that Wayfair pointed to other cases pending in other states, such as Alabama, as examples of more appropriate cases likely to have an appropriate factual record.
“That argument is inconsistent with the fact that NewEgg (represented by Brann Isaacson) is fighting discovery and trying to limit the record in the Alabama case,” Garrett said. “I’d like to say they can’t have it both ways but lawyers get to argue what’s best for their client in each case.”
Joseph Bishop-Henchman, executive vice president at the Tax Foundation, told Bloomberg Tax in an email that the retailers didn’t follow the typical blueprint of an opposition asking the Supreme Court to deny review.
“Usually people asking the Supreme Court not to take a case will say it’s not a serious problem or it still needs to be worked out at the lower court,” Bishop-Henchman said. Here, the online retailers “and a bunch of amicus briefs say it is a huge problem, no solution seems to be working, but that the Court should, even must, stay out. The justices will find that odd,” he said.
The Tax Foundation was one of over a dozen groups that filed a friend-of-the-court brief on or before Nov. 2 in support of South Dakota’s petition.
The lawyers representing the retailers didn’t immediately respond to a request for comment.
The case is South Dakota v. Wayfair, Inc. , U.S., No. 17-494, respondents’ brief in opposition filed 12/7/17 .
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The online retailers' brief in opposition is at http://src.bna.com/uMQ.
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