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Quill at 25: Window Closing on Federal Solution to the Remote Sales Tax Problem

May 26, 2017 at 11:45 AM

Today is the 25th anniversary of the Supreme Court’s Quill decision, which has cost states and localities tens of billions of dollars in uncollected sales taxes and hurt many local businesses. Quill reaffirmed a 1967 decision that a state cannot require an out-of-state retailer to charge sales tax to its residents unless the business has a facility, employees, or another kind of “physical presence” in the state. Interstate commerce exploded just a few years later with the Internet. Companies like Amazon, Dell, and Overstock quickly became retail behemoths, in no small part due to their typical 5-10 percent price advantage over their Main Street competitors because they didn’t have to charge the tax. By 2010, many independent book, camera, and home-goods stores were no longer around, and credible studies pegged the annual state and local government revenue loss from uncollected sales taxes on online sales alone at more than $10 billion.

Since Quill, state and local officials have pursued four major strategies to try to undo the fiscal and economic damage. They have:

  • Sought federal legislation to overturn Quill. Such legislation would empower states to require large remote sellers to charge sales tax in any state that simplified its sales tax law in specified ways — such as by requiring the state tax department to administer all local government taxes. Legislation along these lines has been introduced in nearly every session of Congress and passed the Senate in 2013 with bipartisan support, but the House has never even held a hearing on its version of the bill.
  • Enacted laws to clarify and expand what constitutes a “physical presence.” The most well-known is New York’s 2008 “Amazon law” — which 20 other states have since adopted — that deems an in-state website to represent the physical presence of an unrelated out-of-state retailer when the retailer pays a commission to the website for sending customers its way via clickable banner ads. More recently, Massachusetts asserted that website “cookies,” smartphone shopping apps, and other forms of downloaded software constitute an in-state physical presence of the out-of-state online retailer distributing them.
  • Stepped up efforts to teach uninformed buyers that they owe sales tax on their otherwise taxable online and catalog purchases even if the merchant doesn’t charge the tax. More than 30 states now include information about this self-remittance obligation in their income tax booklets. A growing number are considering a version of a 2010 Colorado law — which the courts recently upheld — that requires online retailers that don’t charge sales taxes to notify their customers that they still probably owe them and to report limited customer purchase information to the state revenue department.
  • Sued non-physically present retailers with the aim of bringing a case to the Supreme Court in hopes that it will reverse Quill. South Dakota is furthest along in this effort, and its case could reach the Court within a year.

Federal legislation remains the preferred solution to this problem. State laws can only chip away at Quill’s physical presence standard, and there’s no guarantee that the Supreme Court will take a new test case or overturn Quill if it does. Moreover, only through federal legislation will remote sellers likely see the simplification and harmonization of state sales tax laws that can minimize their compliance efforts and costs. But Congress’ window to act is rapidly closing. States are increasingly taking matters into their own hands. A nationally uniform solution may soon be off the table for good.