What would happen if the current brick-and-mortar standard for sales taxes continues to survive in an increasingly Web-based world?

The lightning rod is the U.S. Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which forbids states from imposing sales tax collection obligations on remote retailers without a physical presence in-state. States have launched a growing "kill Quill" campaign against the 25-year-old constraint over the past two years, adopting increasingly aggressive measures with the hope of convincing the high court to overturn its precedent.

Challenges are weaving through Alabama, South Dakota and Tennessee over "economic nexus" regimes that expand each state's taxing jurisdiction over e-retailers. Through administrative rule or statute, the states require that retailers satisfying a specified threshold of sales must collect and remit sales tax. Similar economic nexus bills have surfaced in at least 15 statehouses during the 2017 legislative session, riding the growing wave of interest in capturing lost revenue from untaxed remote sales — and ultimately nullifying Quill.

Many anticipate that the Supreme Court will accept a Quill appeal, looking to Justice Anthony Kennedy's 2015 call for a case that triggers reconsideration of the court's earlier holding, given "changes in technology and consumer sophistication." That optimism has been buoyed by the nomination of Neil Gorsuch to join the high court, a judge who has indicated in a past opinion that Quill may be dated.

And others hope that a fleet of competing remote sales tax proposals in Congress — three bills and one discussion draft — signals that federal lawmakers will finally intervene.

Three of the nine justices on the court — Justices Anthony Kennedy, Clarence Thomas and Neil Gorsuch — have said online sales taxes need to be reviewed in light of technological advances.
Three of the nine justices on the court — Justices Anthony Kennedy, Clarence Thomas and Neil Gorsuch — have said online sales taxes need to be reviewed in light of technological advances.

However, there is no coalition behind any of those proposals and the Supreme Court just turned down another case that questioned Quill, from Florida.

In other words, there is no firm guarantee that Quill will die. So what might happen should the Quill physical presence rule remain in place?


Could `Kill Quill' efforts fall short?

Alabama kickstarted the recent "kill Quill" battle, openly inviting a lawsuit over its 2015 economic nexus regulation that revenue officials hope will wind its way to the Supreme Court.

Several states introducing or enacting similar regimes have incorporated language into the bills that suggest a similar motivation — including South Dakota, Arkansas and Indiana. State Sen. Dwight Cook, the Republican sponsor of a North Dakota measure, said recently that his pending 2017 proposal is likewise aimed at overturning Quill.

However, it isn't certain that the high court will accept an appeal.

The top court has batted away the last two disputes that called for the justices to reshape sales tax law (Brohl v. Direct Mktg. Ass'n, U.S., No. 16-458, petition for certiorari denied Dec. 12, 2016; Am. Bus. USA Corp. v. Fla. Dep't of Revenue, 2017 BL 51297, U.S., No. 16-567, petition for certiorari denied Feb. 21, 2017).

However, many point out that those appeals didn't involve direct challenges to Quill.

Charles A. Rothfeld, special counsel with Mayer Brown LLP, said last year that while "there is some degree of murkiness in the state courts, as to where the lines get drawn exactly," there is no conflict among states courts as to whether Quill is good law. And as a general matter, "it's not easy to get the Supreme Court to take the case when there is no conflict in the lower courts."

Moreover, even if the Supreme Court accepts a case for review, it isn't known for overruling its own precedents — especially one that is 25 years old, the unofficial line for when cases become almost untouchable.

Rothfeld said that although it happens sometimes, "it's a very, very heavy lift to get the Supreme Court to overrule its decision."


The impact on the states

The Supreme Court could take several paths if they accepted a Quill challenge. They could affirm or overturn Quill in its entirety, or they could set forth a modified standard.

Sources indicate that a Quill affirmation would deliver a revenue blow to states. According to the National Conference of State Legislatures, with information pulled from a University of Tennessee study, states lost an estimated $23.3 billion in revenue in 2012 from uncollected tax on remote sales.

And many expect that unless Quill is exterminated, cash-strapped states will continue to take a hit with a modern marketplace increasingly defined by digital transactions.

Max Behlke, the NCSL's director of budget and tax policy, said that if the Supreme Court upholds Quill, the physical presence constraint could lead to the end of sales taxes in the U.S. Consumers might see a price drop on purchases — but higher income and property taxes would likely follow.

Absent an enforcement mechanism for sales tax, and in lieu of raising rates, states will seek viable revenue streams to fund essential services like education or law enforcement, Behlke explained.


The impact on retailers

However, some foresee a judicial affirmation of Quill as only temporarily stemming the surge of economic nexus regimes — not foreclosing alternative approaches to capture tax from remote retailers.

Steve DelBianco, executive director at NetChoice, said there are three scenarios in a "keep Quill" landscape:

  • States will claim that Quill doesn't apply to specific taxes, such as Ohio's commercial activity tax and Washington's gross receipts tax. In November 2016, the Ohio Supreme Court declined to extend Quill to the state's business privilege tax. A petition requesting the high court's review is expected in April.
  • States will continue to enact legislation that aren't "kill Quill" laws, but are "creative extensions of nexus" to "withstand the physical presence" rule — such as affiliate, click-through and marketplace provider regimes. While those regimes recognize physical presence as the rule, they define physical presence as including a relationship with an in-state entity that has physical presence.
  • States will pursue "tattletale reporting tactics," such as the Colorado and Louisiana laws that mandate non-collecting remote vendors to report consumers' purchases to the state.

Scott C. Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara Inc., said that if Quill remains good law, states may then deem "any kind of physical presence whatsoever is going to create nexus."

At that point, fulfillment by Amazon.com, FedEx and UPS will become their primary target, Peterson said. This focus would impact any retailer using a fulfillment service to store property — including fulfillment by Wal-Mart Stores.

"That's going to change so much," he said. "Because the states are on really good constitutional standing to say that, if you've got property for sale in my state, that's nexus."


Are notice, reporting regimes the future?

Lynn Granger, spokeswoman for Colorado's Department of Revenue, has said that the state's notice and reporting regime responded to the "growing problem" of uncollected sales and use tax on remote transactions. In the wake of the Supreme Court sidestepping an appeal challenging Colorado's law, seven states have introduced bills this legislative session to create reporting/notice regimes like Colorado's. Those states are Alabama, Arkansas, Georgia, Hawaii, Kansas, Nebraska and Rhode Island.

Louisiana already has adopted comparable legislation, and Oklahoma and Vermont enacted notification laws.

While the regimes are cast as non-tax laws, many suggest they encourage retailers to collect instead, and will be a popular revenue tool should Quill survive. However, Overstock.com and Colony Brands have said that they will comply with the Colorado law, but won't go further to collect and remit in a state in which they have no physical presence.


Is Congress contemplating a ‘Keep Quill' solution?

The judiciary isn't the only political branch with a role in the future of remote sales taxation. In fact, Congress may be the more likely actor. The Supreme Court observed in Quill that Congress has the power to resolve the issue.

Notwithstanding calls to resolve the remote sales tax debate, Congress has stalled. Gestating proposals include the Marketplace Fairness Act and the Remote Transactions Parity Act, which broaden states' taxing authority over remote retailers.

Another pending candidate is the No Regulation Without Representation Act of Rep. Jim Sensenbrenner, R-Wis., first introduced in July 2016, which would codify Quill and dictate that no state could require collection or reporting from retailers without a physical presence.

Another framework is the discussion draft of the Online Sales Simplification Act of Rep. Robert Goodlatte, R-Va. The plan is a hybrid origin-based system that generally bases the taxation of remote purchases on the seller's location, but at the tax rate of the consumer's location.

"Goodlatte's bill confirms the physical presence standard with specificity, and then goes on to open the door to a multistate compact that allows home state enforcement on remote sales," DelBianco said, adding that "the beauty of the congressional approach, of either Sensenbrenner or Goodlatte, is they in fact would stop the madness of all these state bills."


What are the chances of Congress sustaining ‘Quill'?

Sources have said that congressional leadership feels pressure to secure a national solution in 2017. However, there is skepticism that Congress will address the long-shelved issue this year, particularly given they're already mired in other matters related to overhauling the Tax Code and the Affordable Care Act.

Should Congress break from its holding pattern, the ultimate solution is anyone's guess. Many indicate that the Sensenbrenner and Goodlatte proposals won't have sufficient support, but others have advised not to discount those measures.


Could this self-correct?
In the meantime, many states are already seeing success with their regimes, regardless of their compliance with Quill.

Of the states with sales tax, Hawaii, Idaho, Maine and New Mexico are the only four states in which Amazon hasn't agreed to start collecting tax. The retail behemoth has announced a flurry of agreements this year to start collecting in states, including jurisdictions in which it lacks physical presence.

DelBianco noted that Amazon's business model has led to its expansion into more states to provide faster fulfillment. Likewise, competition over customer service and rapid shipping will encourage other retailers to expand their physical footprint, thus triggering collection obligations in more locations.

Davison said that several ACMA members are "aggressively piercing nexus" by opening brick-and-mortar stores in states, "because they believe that's the best way to serve their customers."

However, others have noted that not all retailers lacking an in-state footprint are keen to follow Amazon's lead and start voluntarily collecting. Several smaller businesses don't have the need — i.e., a small customer base — or desire to establish physical locales.

"States in which Amazon is collecting may think they've solved this," Behlke said. However, he explained that Amazon only collects for items it sells — not items sold by third-party providers through the marketplace platform.

Jennifer McLoughlin

Jennifer McLoughlin

Jennifer McLoughlin covers state and local tax issues in all 50 states and the District of Columbia for Bloomberg BNA.