The debate over online sales tax is a heated one, with legislators and lobbyists split as to which side of the issue they agree with. Retailers have sat in limbo – some anxiously waiting, some supporting the tax, others doing their own grass-roots lobbying against the idea.
But another approach may be on the horizon.
In a groundbreaking statement, Supreme Court Justice Anthony Kennedy has called for supporters of an internet sales tax to bring a case before the SCOTUS that would allow the court to reexamine the 1992 Quill Corp. v. North Dakota decision.
This came about during the recent case of Direct Marketing Association v. Brohl, which relates to a Colorado law that requires out of state retailers with Colorado sales in excess of $100,000 annually, to report sales within the state to the Colorado government, who can use that information to collect the state’s lost 2.9% sales tax as a use tax, directly from the purchaser. The law has been challenged by the Direct Marketing Association, saying that it discriminates against interstate commerce. The Supreme Court ruled that the case should be heard in a federal court, rather than a state one.
Direct Marketing Association v. Brohl, in and of itself, didn’t bring the Quill decision to light. But the relationship of the two cases led Justice Kennedy to make his recent declaration. His argument is that technology changes the way buyers access merchandise. “A business may be present in a state in a meaningful way without that presence being physical in the traditional sense of the term”, Justice Kennedy states, adding that, “A connection to a shopper’s favorite store is a click away regardless of how close or far the nearest storefront.”
What is the Quill Decision?
The Quill Decision refers to the 1992 ruling in Quill Corp. v. North Dakota. It’s the law currently in use as precedent that states that retailers must have a physical presence in a state in order for that state to compel them to collect sales tax from its customers. This physical presence is called the sales tax nexus. As an example, a business with its headquarters in New York and a satellite office in Dallas, Texas, would be required to collect sales tax from New York and Texas-based customers, and send that money to the respective states. But if the business has no physical presence in Nebraska, then Nebraska can’t require the retailer to tax its Nebraska-based customers.
This creates a sales tax collection disparity for Nebraska in that the customer owes the use tax for the item purchased, but rarely if ever actually remits that tax to the state. At the time of the Quill decision, there were no technological capabilities that could afford a state an option to seek collection, reporting and remittance of the sales tax from the seller, but in 2015, that problem no longer exists.
But Justice Kennedy didn’t stop there.
He says the decision in the Quill case was questionable even when it was handed down. The decision even states, “the underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.“
Only time will tell whether the Quill decision stands or is overturned, and whether the ultimate decision will be handled by Congress or the Supreme Court. In the interim, sellers continue to wait and see.