Revenge of the Dakotas: A Challenge to Quill
- Sales and Use Tax
- March 24, 2016 | Gail Cole
Many remote retailers will have to start collecting and remitting South Dakota sales and use tax on May 1, 2016. South Dakota Governor Daugaard has put his signature on Senate Bill 106, which establishes nexus for certain out-of-state sellers that do business with South Dakota customers.
Like similar policies that have been enacted by other states in recent years, SB 106 challenges the physical presence requirement that was upheld in the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota. But this bill is very different from those that have come before.
The other Dakota
Towards the end of the last century, the Quill Corporation sold office equipment and supplies to approximately 3,000 customers in North Dakota. Quill solicited business through catalogs, flyers, ads in national periodicals and telephone calls, and delivered orders via common carrier. As it had no physical presence or employees in North Dakota, it lacked nexus and had no obligation to collect or remit North Dakota sales or use tax.
North Dakota challenged that physical presence requirement and sought to collect sales and use tax from Quill. The Supreme Court ruled in favor of the company, although the opinion did acknowledge there was a better venue for the discussion:
“[T]he underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions…. Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”
Proper venue or no, the Quill decision has been taken as gospel for more than 2 decades. Although the Court invited Congress to take up the issue and numerous lawmakers have attempted to do so, Congress has thus far refused to confront the physical presence requirement upheld in Quill.
But 1992 was not only a different century, it was a different world. Few people had email back then—now few people lack easy access to Internet connectivity. Quill was able to reach at least 3,000 North Dakotans via paper advertisements and telephone calls. Today, they can reach anyone in any state who interfaces with the Internet. And unless they have a physical presence in a state, they don’t have to collect tax on the sales.
Numerous states have already or are now in the process of challenging the existing physical presence requirement. Many take the position that the Internet creates a presence of another kind. Some (including Michigan, Washington, and most recently, Louisiana) have created click-through nexus or affiliate nexus laws, arguing that a connection is created through ties to in-state businesses and links on their websites.
The South Dakota measure is a bit different. It makes no mention of affiliates or website links. Instead, it creates a tax obligation for sellers that earn an excess of $100,000 from at least 200 sales of tangible personal property or services delivered or transferred electronically to South Dakota customers, and it explains why the Legislature finds this law to be necessary. Reasons include:
- “The inability to effectively collect sales or use tax from remote sellers… is seriously eroding the sales tax base of this state.”
- “The harm from the loss of revenue is especially serious in South Dakota because the state has no income tax, and sales and use tax revenues are essential in funding state and local services.”
- “Despite the fact that a use tax is owed [on these transactions], many remote sellers actively market sales as tax free or no sales transactions.”
- “The structural advantages of remote sellers, including the absence of point-of-sale tax collection, along with the general growth of online retail, make clear that further erosion of this state’s sales tax base is likely in the near future.”
- “Remote sellers who make a substantial number of deliveries into or have large gross revenues from South Dakota benefit extensively from this state’s market, including the economy generally, as well as state infrastructure.”
South Dakota then throws down the gauntlet. SB 106 further explains:
- “Given the urgent need for the Supreme Court of the United States to reconsider this doctrine, it is necessary for this state to pass this law clarifying its immediate intent to require collection of sales taxes by remote sellers, and permitting the most expeditious possible review of the constitutionality of this law.”
- “Expeditious review is necessary and appropriate because, while it may be reasonable notwithstanding this law for remote sellers to continue to refuse to collect the sales tax in light of existing federal constitutional doctrine, any such refusal causes imminent harm to this state.”
- “At the same time, the Legislature recognizes that the enactment of this law places remote sellers in a complicated position, precisely because existing constitutional doctrine calls this law into question. Accordingly, the Legislature intends to clarify that the obligations created by this law would be appropriately stayed by the courts until the constitutionality of this law has been clearly established by a binding judgment, including, for example, a decision from the Supreme Court of the United States abrogating its existing doctrine, or a final judgment applicable to a particular taxpayer.”
- “It is the intent of the Legislature to apply South Dakota's sales and use tax obligations to the limit of federal and state constitutional doctrines, and to thereby clarify that South Dakota law permits the state to immediately argue in any litigation that such constitutional doctrine should be changed to permit the collection obligations of this Act.”
SB 106 explains that South Dakota needs this law to safeguard its economy. Furthermore, the state has the right to challenge any doctrine (such as Quill or the Commerce Clause its decision is based on) that prevents the enactment of this law.
Will this South Dakota law be used to challenge Quill? Stay tuned.