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Will Overruling Quill v. North Dakota Really Matter?

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It seems likely the U.S. Supreme Court will overrule its decision in Quill v. North Dakota—the case that forbids states from requiring an out-of-state seller to collect the state’s sales tax when the seller does not have physical presence in the state. Over the last 10+ years, states have attempted to chip away at Quill by creating new forms of physical presence—click-through physical presence, affiliate physical presence, internet cookies physical presence, marketplace facilitator physical presence—and two years ago, Justice Kennedy called for states to pass laws openly violating Quill’s physical presence test to provide the Court with an opportunity to “reconsider” Quill. Many states responded alleging they’ve been losing billions of dollars in uncollected sales tax. South Dakota is the first to reach the Court. Its petition for cert was granted January 12, 2018.

I wonder, however, whether overruling Quill will really provide as much relief as states are hoping for or whether it will just lead to litigation over a new issue.

Before Quill, both the Due Process Clause and the dormant Commerce Clause both prohibited states from compelling collection of their sales tax in the absence of physical presence, and it was difficult to tell whether there was any meaningful difference between what the two clauses prohibited.

In Quill, the Court clearly distinguished between the two. It stated the Due Process Clause was concerned with notice and fairness and required only that the business purposefully avail itself of the benefits of the state’s economic market, whereas the dormant Commerce Clause protected against burdens on interstate commerce and required a more “substantial nexus” between the business and the state. Thus, it held the dormant Commerce Clause required physical presence before a state could compel collection of its sales tax; the Due Process Clause did not.

The “substantial nexus” standard came from an earlier case (Complete Auto v. Brady) that established a four-part test for determining the validity of state laws (not just tax laws) under the dormant Commerce Clause. Substantial nexus was part One.

When Quill falls, I think substantial nexus will be discarded and the fall-back will be the Due Process Clause’s purposeful availment standard. If I’m right about that, the question will then become when does a business purposefully avail itself of a state’s markets, benefits, and/or protections?

The Court held that Quill Corp. had purposefully availed itself of the North Dakota market because Quill had systematically targeted customers there by sending catalogs and flyers, advertising, and telemarketing. But is that activity characteristic of the online retailers currently not collecting sales tax?

Online retailers purposefully avail themselves of the world wide web, Facebook, Twitter, and other social media sites, but not of any particular jurisdiction. Or do they? Is advertising on YouTube equivalent to advertising on national television? Does placing cookies on website visitor’s computers show purposeful availment? Most importantly, because many of the new state laws openly violating Quill establish a sales or transaction volume threshold, does merely exceeding those threshold’s show purposeful availment?

If purposeful availment becomes the new standard, these are the questions courts will have to resolve.

Oral arguments are scheduled to occur April 17, 2018. We’ll see what happens. Stay tuned.

Steve’s Ohio tax experience began over a decade ago at the Ohio General Assembly where he drafted the State’s tax legislation. Immersed daily in Ohio’s sales and use tax laws, Steve quickly became an expert on Ohio’s manufacturing, restaurant, oil and gas, R&D, and other sales tax exemptions, and on the taxability of data processing, cloud computing, computer, and other services. Five years later, Steve joined Big 4 firm pwc where he put his sales and use tax knowledge to practical use on a national level. Steve also worked for a global software development company where he was responsible for sales, use and other tax compliance.

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Other recent “Ohio (OH)” posts by Steve Estelle, Esq.:

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