April 24 2018
Is it Time to Kill Quill?
State government leaders are well-acquainted with a 1992 Supreme Court decision that prohibits states from collecting sales tax on vendors lacking an in-state physical presence. The case, Quill Corp v. North Dakota, has triggered arguably the most robust state and local tax-related activity in the last two decades, with a stampede to “kill Quill.”
Now, after years of rejected petitions and hours of brief preparation, the high court is beginning oral arguments in South Dakota v. Wayfair, a case that directly challenges the Quill decision.
As internet sales continue to put brick and mortar stores in peril at an alarming rate, state revenue has taken a direct hit—the recent closing of Toys R Us is just the latest example of crumbling brick and mortar sources of tax revenue. The meteoric rise of internet commerce is a great factor in sales tax revenue deficits in an increasing number of states. The Supreme Court decided to accept the case in recognition of these closings and the fact that states have been finding ways to circumvent the Quill ruling.
While some states have revised nexus thresholds based on sales figures, others are trying to adopt alternative ways of expanding state law tax collecting authority. More recently, states are enacting laws which place tax collection responsibility on Amazon and similar companies on behalf of the third-party sellers that are on their platforms.
Implication for Texas, Other States
What’s at stake? If the courts reverse Quill, state and local governments could potentially collect billions of dollars in sales tax from online retailers. According to the nonpartisan Government Accountability Office, state and local governments could have collected up to $13 billion more in 2017 alone if they had been authorized to require sales tax payment from online sellers.
States like Texas that don’t have a state income tax depend largely on sales tax. Consider that more than half of the state’s 2017 revenue was from the state’s 8.25 percent sales tax. According to figures from the Texas Comptroller’s office, state officials estimate that Texas is missing out on more than $1 billion each year from online shopping sales tax; local governments in the state could gain as much as $200 million per year. With the rampant increase in internet sales each year, those estimates will only climb.
What to Expect
In its case, South Dakota is making the argument that Quill is obsolete given the massive surge in e-commerce sales over the last 26 years. However, the other side – online retailers like Wayfair and Overstock – are challenging that South Dakota’s digital sales tax statute is unconstitutional under Quill. They predict a compliance cost nightmare if they are forced to collect tax in multiple states with widely varying definitions of exactly what is taxable.
Many online retailers believe that matter should be settled by Congress and not the court. Still, while both the House and Senate have introduced bills, Congress has never taken up the issue.
President Trump has been quite vocal in his position that online retailers like Amazon pay state and local tax.
Will the Supreme Court establish a firm threshold for tax rules and provide states guidelines, or will Congress establish restrictive thresholds, preventing states from tax revenue increases? Both online retailers and state governments are holding their collective breaths as they await the court’s decision, which is expected by late June.
Goldin Peiser & Peiser will closely monitor the Supreme Court’s action and provide further updates as developments occur.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.