I get pretty bent out of shape whenever I see a state enact a law or take a position that runs counter to a Supreme Court ruling and which, in effect, says “sue me” to the aggrieved citizenry.
I find it particularly annoying when this tactic is employed in the realm of taxes, in which states have everything to gain economically and everyone else can only lose. Sure, I realize that in the cosmic scheme of things there are greater injustices out there, but this one would be pretty easy to fix. If you are a state, don’t burden the public in a way that has already been deemed to violate constitutional rights. If you are a court, and particularly a federal court, vindicate those rights by establishing some financial disincentives for states that might otherwise be tempted to engage in legal strong-arm tactics.
In the most recent of such attempts, a group of states is seeking to pick a fight so it can re-litigate Quill v. North Dakota. That decision, about which I have written before, is the center around which the fight over Internet commerce has revolved almost since it was handed down in 1992. Officials in 13 states have grown tired of waiting for Congress to address their complaints about Quill, and so have decided to try to force the issue back to the Supreme Court.
It takes at least two parties to have a fight, however, so the first step is to enact laws that either arguably or certainly violate the Quill holding, and then wait for an aggrieved taxpayer, or group of taxpayers, to sue. Never mind the burdens in legal costs and otherwise productive time lost by those taxpayers in accommodating the states’ wish for another trip to the high court.
Quill’s central holding is that a state cannot force out-of-state vendors to collect and remit sales taxes unless the vendor has a store, warehouse or other physical presence in the state. The states’ recent efforts to loosen or reverse this holding have taken several forms, according to a recent article in The Wall Street Journal. Alabama revenue officials began to enforce an existing law their agency claims allows it to tax out-of-state vendors, with the promise to audit sellers that do not comply. Colorado’s practice of requiring merchants to report how much each state resident purchases, which came to the Supreme Court’s attention last year, was recently supported by a favorable federal appeals court decision. Utah’s Senate will consider a bill that would expand the definition of physical presence in a state to include certain third-party delivery companies, a clear piece of “nuisance” legislation designed to generate legal pushback.
The proper venue for the fight over the future of Internet sales tax is in Congress. But since Congress has, for more than two decades, failed to give the states what they want – which is the right to force out-of-state vendors to collect and remit their sales taxes – the states are just going ahead and attempting to create that outcome on their own.
It is a strategy that could backfire.
In Quill, the high court held that there is no violation of constitutional due process to require out-of-state businesses to collect sales taxes, even if they have no presence in a particular state. However, the court held that it would violate the commerce clause, which states that only Congress has the power to regulate interstate commerce unless it delegates that power. Hence the long battle to get Congress to delegate it.
In 1992, companies seeking to make long-distance sales would have to deliberately target a market by advertising there or by using mailing lists that they had to buy, rent or create. A company like Quill Corporation, which then sold its office products through printed catalogs, could know exactly which customers it was targeting and in which jurisdictions they resided – and, more importantly, exactly where the merchandise was shipped.
That’s a world away from today’s marketplace, where online sales are made through mobile devices that can literally be anywhere, and where the “products” being sold might be services such as legal advice, mortgage searches, the latest crossword puzzle app, or the right to stream a movie or a song. Vendors may not even be able to rely on the billing address on a credit card to indicate where the buyer is using the product - either because the product can be used anywhere or because some modern forms of payment do not provide any sort of address to a seller.
If the states get their wish and convince the Supreme Court to take up Quill again, they may not get the reversal they seek on the commerce clause. They may, instead, discover that the court finds that in today’s world, due process is not available when a vendor who can be located anywhere is forced to track every nuance of every sales tax jurisdiction everywhere, merely because it wishes to conduct business online.
Such a result would serve the states right.
And while all this is happening, it would be an excellent wrinkle to hold states liable for legal fees and other expenses for defendants who are required to challenge a state tax statute that clearly contravenes prior Supreme Court holdings, if the state cannot show that it had a reasonable basis for believing the prior case law to be inapplicable. This is not the usual rule in this country, but the imbalance of power between states and the public – particularly a segment of the public that does not even have a connection to the state in question – could warrant such a holding.
The problems stemming from the interstate taxation of online sales are no easier to solve today than they have been for the past two decades. If states really want to level the playing field, they should standardize their rules and sacrifice their policymaking flexibility to create a national sales tax collection system. Lawmakers in state capitals have been unwilling to do that, instead preferring to shift the compliance burdens to the public, especially the segment of the public that does not vote or conduct business in their states. They are being bullies, and it will be no more than they deserve if they find themselves worse off as a result.
Posted by Larry M. Elkin, CPA, CFP®
photo by Drew Stephens
I get pretty bent out of shape whenever I see a state enact a law or take a position that runs counter to a Supreme Court ruling and which, in effect, says “sue me” to the aggrieved citizenry.
I find it particularly annoying when this tactic is employed in the realm of taxes, in which states have everything to gain economically and everyone else can only lose. Sure, I realize that in the cosmic scheme of things there are greater injustices out there, but this one would be pretty easy to fix. If you are a state, don’t burden the public in a way that has already been deemed to violate constitutional rights. If you are a court, and particularly a federal court, vindicate those rights by establishing some financial disincentives for states that might otherwise be tempted to engage in legal strong-arm tactics.
In the most recent of such attempts, a group of states is seeking to pick a fight so it can re-litigate Quill v. North Dakota. That decision, about which I have written before, is the center around which the fight over Internet commerce has revolved almost since it was handed down in 1992. Officials in 13 states have grown tired of waiting for Congress to address their complaints about Quill, and so have decided to try to force the issue back to the Supreme Court.
It takes at least two parties to have a fight, however, so the first step is to enact laws that either arguably or certainly violate the Quill holding, and then wait for an aggrieved taxpayer, or group of taxpayers, to sue. Never mind the burdens in legal costs and otherwise productive time lost by those taxpayers in accommodating the states’ wish for another trip to the high court.
Quill’s central holding is that a state cannot force out-of-state vendors to collect and remit sales taxes unless the vendor has a store, warehouse or other physical presence in the state. The states’ recent efforts to loosen or reverse this holding have taken several forms, according to a recent article in The Wall Street Journal. Alabama revenue officials began to enforce an existing law their agency claims allows it to tax out-of-state vendors, with the promise to audit sellers that do not comply. Colorado’s practice of requiring merchants to report how much each state resident purchases, which came to the Supreme Court’s attention last year, was recently supported by a favorable federal appeals court decision. Utah’s Senate will consider a bill that would expand the definition of physical presence in a state to include certain third-party delivery companies, a clear piece of “nuisance” legislation designed to generate legal pushback.
The proper venue for the fight over the future of Internet sales tax is in Congress. But since Congress has, for more than two decades, failed to give the states what they want – which is the right to force out-of-state vendors to collect and remit their sales taxes – the states are just going ahead and attempting to create that outcome on their own.
It is a strategy that could backfire.
In Quill, the high court held that there is no violation of constitutional due process to require out-of-state businesses to collect sales taxes, even if they have no presence in a particular state. However, the court held that it would violate the commerce clause, which states that only Congress has the power to regulate interstate commerce unless it delegates that power. Hence the long battle to get Congress to delegate it.
In 1992, companies seeking to make long-distance sales would have to deliberately target a market by advertising there or by using mailing lists that they had to buy, rent or create. A company like Quill Corporation, which then sold its office products through printed catalogs, could know exactly which customers it was targeting and in which jurisdictions they resided – and, more importantly, exactly where the merchandise was shipped.
That’s a world away from today’s marketplace, where online sales are made through mobile devices that can literally be anywhere, and where the “products” being sold might be services such as legal advice, mortgage searches, the latest crossword puzzle app, or the right to stream a movie or a song. Vendors may not even be able to rely on the billing address on a credit card to indicate where the buyer is using the product - either because the product can be used anywhere or because some modern forms of payment do not provide any sort of address to a seller.
If the states get their wish and convince the Supreme Court to take up Quill again, they may not get the reversal they seek on the commerce clause. They may, instead, discover that the court finds that in today’s world, due process is not available when a vendor who can be located anywhere is forced to track every nuance of every sales tax jurisdiction everywhere, merely because it wishes to conduct business online.
Such a result would serve the states right.
And while all this is happening, it would be an excellent wrinkle to hold states liable for legal fees and other expenses for defendants who are required to challenge a state tax statute that clearly contravenes prior Supreme Court holdings, if the state cannot show that it had a reasonable basis for believing the prior case law to be inapplicable. This is not the usual rule in this country, but the imbalance of power between states and the public – particularly a segment of the public that does not even have a connection to the state in question – could warrant such a holding.
The problems stemming from the interstate taxation of online sales are no easier to solve today than they have been for the past two decades. If states really want to level the playing field, they should standardize their rules and sacrifice their policymaking flexibility to create a national sales tax collection system. Lawmakers in state capitals have been unwilling to do that, instead preferring to shift the compliance burdens to the public, especially the segment of the public that does not vote or conduct business in their states. They are being bullies, and it will be no more than they deserve if they find themselves worse off as a result.
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