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March 6, 2015
Will the U.S. Supreme Court Revisit Quill?
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Many Court watchers felt that the U.S. Supreme Court harbored no desire to review Commerce Clause nexus questions.  It had rejected several past petitions to resolve substantial nexus arguments based on Quill[1].  Many believed that the Court was content to let Congress wrestle with it under the Marketplace Fairness Act (MFA) and similar legislative acts.  Ironically, in a case that did not directly raise the validity of Quill, the Court’s March 3, 2015 decision in Direct Marketing Ass’n v. Brohl[2] (“DMA”) included a concurring opinion that signaled at least one Justice’s interest to examine what substantial nexus means under Quill

DMA and the Tax Injunction Act

DMA arose under the federal Tax Injunction Act (TIA).  The question was whether Colorado could require remote sellers — with no sales or use tax collection requirements — to file information reports that identified Colorado purchasers for the tax agency.  With such information, the state could directly pursue use tax collection from its residents.  The Court, through a five member majority, and two concurrences held no, that the act did not apply and the federal courts could review whether a state should be enjoined from violating a taxpayer’s rights by enforcing the tax reporting requirements against these remote sellers.  The Court sent it back to the trial court for actions consistent with its opinion.

So, How Did the TIA Draw Quill into the Discussion?

Frankly, the TIA part of the case was not that interesting.  The interesting part of the case was Justice Kennedy’s lone concurrence.  He agreed with the majority that the TIA did not apply but also suggested that the Court should reconsider Quill because times are different and tax laws may need to change with the times.  His concurrence raises the question:  Does evolving technology and the growth of e-commerce warrant a different conclusion from Quill?

Preliminarily, I question one part of his analysis.  One of his reasons to review Quill does not logically fit for me.  Relying on D. H. Holmes Co. v. McNamara, 486 U. S. 24, 31 (1988) (“D.H. Holmes”), he says: "After all, 'interstate commerce may be required to pay its fair share of state taxes.’"  That’s true but irrelevant to my way of thinking.  In that case, the state assessed use tax against the taxpayer that had distributed and used catalogs in LA.  By contrast, the seller in Quill was only collecting the sales/use tax, and was not the taxpayer paying the tax.  In D.H. Holmes, it was the user paying the use tax and paying its fair share of taxes.  When the local buyer complies with state use tax laws, then interstate commerce pays its fair share of tax.  Thus, the Quill case is not a question of whether taxpayers like Quill that engage in interstate commerce may be required to pay its fair share of state taxes, but rather, it is a question of whether taxpayers engaged in interstate commerce may be required to assure that the local buyers pay their fair share of taxes

No other Justices joined him in his concurrence, so whether he shares that view alone or others on the Court embrace the same itch to re-examine Quill is uncertain.

What Could Happen If the Court Overturns Quill?

It Would Put Domestic Remote Sellers on the Same Playing Field as the Bricks–and-Mortar Retailers.

The more important and global question in my mind is whether U.S. sellers, remote and the bricks-and-mortar alike, are better off with Quill?  No doubt, in fairness to the local bricks-and-mortar stores, compelling remote sellers to comply with the same sales/use tax collection requirements makes sense from their perspective to level the playing field.  On the other hand, there are reasons against allowing states to reach remote sellers, because such reach places a much greater financial burden on the remote sellers that local sellers do not have (e.g., selling complying with the different jurisdictions that gave different deductions and exemptions, different rates and different measures).  That debate rages on among those that want remote sellers to collect the sales and use tax and those who do not want remote sellers to bear that burden.  Regardless of which side is right might be irrelevant in the long view of the situation.

Would It Give Foreign Sellers an Advantage Over the Domestic Sellers?

Regardless of whether the remote sellers should collect the sales/use tax, overruling Quill (or adopting legislation like the Marketplace Fairness Act (MFA)) presents another problem.  The Court overruling Quill or Congress enacting the MFA does nothing to enhance the state’s power to compel foreign sellers to collect and remit the sales tax.  That might mean foreign internet sellers could usurp the market share left void by attaching nexus to the domestic remote sellers.  This event would come at the expense of both the bricks-and-mortar and remote sellers. 

How Would States Enforce Their Assessments in Foreign Countries?

Without jurisdiction over foreign sellers, how could the government counteract an increase in these foreign remote sellers?  Some respond that because the imported goods need to go through customs, the state tax could be collected at that point before the goods are allowed to pass through customs.  That might be a solution, but that assumes that foreign sellers will import the goods.  What if the foreign sellers buy the goods from US manufacturers or distributors and then drop-ship the goods?  While some opine that states might be able to require the domestic manufacturers and distributors to collect the tax, how would the domestic drop-shippers know the selling price to the customer?  They have no agreement with the customer.  Only the foreign seller has that information and it is not likely that it would be willing to share that information with the drop-shipper.

On its face, the states would have no jurisdiction to compel foreign sellers to collect the sales tax if they have no stateside presence.  It seems that the United States would need treaties with every country where a remote seller might locate.  In my opinion, that’s not likely.  States would likely waste scarce public resources to try to enforce their assessments in China, the Cayman Islands and other foreign locations that would have little sympathy for the states.  But, even if it was jurisdictionally possible, the cost to chase sellers around the globe would be very costly and inefficient … and that is assuming that the states could actually identify all of the sellers.

Would Overruling Quill Make the Tax Inversion Problem Worse?

If a domestic remote seller sees its business leaking to offshore retailers, then would that seller figuratively throw its hands in the air, quit making retails sales and look for another line of business?  Probably not.  Instead, it is more likely that the domestic remote seller will (1) create a foreign selling entity, (2) move the internet selling operations beyond the U.S. taxing jurisdictions and (3) contract with domestic drop-shippers.  This would only shift more revenue to foreign countries, exacerbating the tax inversion problem.


[1] Quill Corp. v. North Dakota, 504 U. S. 298, 311 (1992).


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