It took more than two decades, but Sen. Mary Kathryn “Heidi” Heitkamp got a long-awaited chance to have the last word against the Supreme Court. That’s no small accomplishment for a freshman Democrat from North Dakota.
Heitkamp co-sponsored and helped pass the Marketplace Fairness Act of 2013, otherwise known as the Internet sales tax bill. If the legislation makes it through the House of Representatives – a doubtful but not inconceivable prospect – it will effectively reverse the outcome of the pivotal 1992 Supreme Court tax case known in short as Quill Corp. v. North Dakota, and in full as Quill Corporation, Petitioner v. North Dakota by and through its Tax Commissioner, Heidi Heitkamp.
It was only a quirk of political fate that Heitkamp arrived in the Senate just in time to push through the legislation that would undo a legal setback that has frustrated state tax collectors for the past two decades. But the bill’s progress was no accident; it is the result of a massive, years-long effort by cash-hungry states, local stores struggling against mounting online competition, and - most recently - giant web-based retailers that see a chance to gain a competitive edge against smaller upstarts.
Quill established that only retailers with a physical presence in a given state must collect sales tax for that state. When residents of states with sales taxes make purchases from out-of-state retailers, they are required to send in their tax payments directly to their home states, in the form of “use tax.” But hardly anyone does that. As a result, states lose an estimated $12 billion a year.
Brick-and-mortar stores complain that they are at an unfair disadvantage. Since they must include sales tax in their prices, they can be easily undercut by online competitors. As smartphones make online purchasing even easier, local stores have considerable cause to fear that they will be reduced to acting as showrooms for their competitors.
Supporters of the Senate bill claim it would help states collect their existing taxes and level the playing field for brick-and-mortar and online businesses. Under the bill, any retailer that does not qualify for a narrow “small seller” exemption could be forced to collect tax for any state that meets a basic set of requirements.
The bill attempts to resolve a conflict that has been simmering since the Supreme Court’s 1992 ruling in Quill. In that case, North Dakota sought to force Quill Corporation, an office supply company, to collect tax on sales to North Dakota residents. Quill had no offices or warehouses in North Dakota, though it did solicit sales through catalogs and accepted orders via toll-free phone lines.
The Court ruled that it does not violate the due process rights of out-of-state retailers to force them to collect sales taxes for states in which they solicit business yet do not have a physical presence. This was a victory for the states, reversing a holding from a 1967 case known as National Bellas Hess.
But it was a hollow victory, because the high court went on to hold that only Congress could regulate interstate commerce by forcing interstate sales tax collection. Congress, however, could delegate that power to the states, the court further held. Thus began the 20-year battle to get Congress to do just that.
In the meantime, states have been creative about trying to conjure a physical presence through the barest wisps of local connection. I wrote about one of the biggest battles in this fight in 2009, when New York, followed by other states, attempted to claim that affiliate programs like the one popularized by Amazon were enough to constitute a physical presence.
The Senate bill would make the debate over physical presence irrelevant. However, far from simplifying matters, it would introduce a new, even more convoluted structure, forcing retailers to navigate the tax codes of states where they have no real business interests. To get permission under the bill to collect tax from out-of-state companies, states must either join the Streamlined Sales and Use Tax Agreement or implement a set of “minimum simplification requirements” outlined in the bill itself. However, even the Streamlined Sales and Use Tax Agreement has had only minimal success in harmonizing the various states’ myriad rules about what goods and services are to be taxed and how taxes are to be remitted.
Internet behemoths like Amazon have abruptly become supporters of the Senate legislation, after fighting similar efforts for years. Amazon has warehouses and other facilities in a growing number of states, requiring it to collect taxes in those locales where smaller rivals are exempt. It also has the internal resources to comply with the demands of dozens of taxing jurisdictions; smaller sellers do not. The Senate bill’s small seller exception applies only to companies with less than $1 million in annual out-of-state sales, meaning that many small businesses would still be subject to the law.
While the Senate bill would stop debates over the “physical presence” of sellers, it would introduce a whole new set of questions about the physical locations of buyers. According to the bill, the state of the buyer will be determined by “the location where the product or service sold is received by the purchaser.” That’s fine if the product is a box of pens or a packaged DVD. It’s less useful if the “product” is a subscription to Netflix’s Instant View program or the services of a tax professional who electronically files the seller’s returns in many states around the country.
Forget tax fairness. You could call this legislation the Law of Unintended Consequences. Local stores only have to worry about the tax rules in their own locale; the Senate legislation will saddle sellers in places like Muskogee, Okla., with the burden of knowing tax rules and responding to tax audits in places like Bismarck, N.D., and Augusta, Maine.
When things get messy enough, someone will start looking for new solutions. One possible avenue would be for the federal government to take over the task of collecting sales taxes across state lines, with uniform rules and procedures established by the Internal Revenue Service. Of course, once the IRS is in the business of collecting sales taxes, expect it to rake off a share for Uncle Sam, too. That’s not a prospect that will make too many consumers happy.
The Supreme Court might also step back into the fray. The Senate’s legislation was made possible because the Quill court found that turning out-of-state businesses into unwilling tax collectors is allowed under the Due Process clause. That holding predates the Internet, which made it possible to solicit multi-state sales simply by putting up a website. The Court might revisit this concept in a future case that seeks to restore the National Bellas Hess rule. I don’t think the current justices are highly inclined to do this, but a future set - one more attuned to the complexities and opportunities of online life - just might.
Of course, all of that is a long way off. It may still be years before we know where Quill Corp. v. North Dakota will take us. But in the more personal battle between out-of-state retailers, the Supreme Court and the one-time North Dakota Tax Commissioner who is now a senator, Heidi Heitkamp has finally won a round.
Posted by Larry M. Elkin, CPA, CFP®
It took more than two decades, but Sen. Mary Kathryn “Heidi” Heitkamp got a long-awaited chance to have the last word against the Supreme Court. That’s no small accomplishment for a freshman Democrat from North Dakota.
Heitkamp co-sponsored and helped pass the Marketplace Fairness Act of 2013, otherwise known as the Internet sales tax bill. If the legislation makes it through the House of Representatives – a doubtful but not inconceivable prospect – it will effectively reverse the outcome of the pivotal 1992 Supreme Court tax case known in short as Quill Corp. v. North Dakota, and in full as Quill Corporation, Petitioner v. North Dakota by and through its Tax Commissioner, Heidi Heitkamp.
It was only a quirk of political fate that Heitkamp arrived in the Senate just in time to push through the legislation that would undo a legal setback that has frustrated state tax collectors for the past two decades. But the bill’s progress was no accident; it is the result of a massive, years-long effort by cash-hungry states, local stores struggling against mounting online competition, and - most recently - giant web-based retailers that see a chance to gain a competitive edge against smaller upstarts.
Quill established that only retailers with a physical presence in a given state must collect sales tax for that state. When residents of states with sales taxes make purchases from out-of-state retailers, they are required to send in their tax payments directly to their home states, in the form of “use tax.” But hardly anyone does that. As a result, states lose an estimated $12 billion a year.
Brick-and-mortar stores complain that they are at an unfair disadvantage. Since they must include sales tax in their prices, they can be easily undercut by online competitors. As smartphones make online purchasing even easier, local stores have considerable cause to fear that they will be reduced to acting as showrooms for their competitors.
Supporters of the Senate bill claim it would help states collect their existing taxes and level the playing field for brick-and-mortar and online businesses. Under the bill, any retailer that does not qualify for a narrow “small seller” exemption could be forced to collect tax for any state that meets a basic set of requirements.
The bill attempts to resolve a conflict that has been simmering since the Supreme Court’s 1992 ruling in Quill. In that case, North Dakota sought to force Quill Corporation, an office supply company, to collect tax on sales to North Dakota residents. Quill had no offices or warehouses in North Dakota, though it did solicit sales through catalogs and accepted orders via toll-free phone lines.
The Court ruled that it does not violate the due process rights of out-of-state retailers to force them to collect sales taxes for states in which they solicit business yet do not have a physical presence. This was a victory for the states, reversing a holding from a 1967 case known as National Bellas Hess.
But it was a hollow victory, because the high court went on to hold that only Congress could regulate interstate commerce by forcing interstate sales tax collection. Congress, however, could delegate that power to the states, the court further held. Thus began the 20-year battle to get Congress to do just that.
In the meantime, states have been creative about trying to conjure a physical presence through the barest wisps of local connection. I wrote about one of the biggest battles in this fight in 2009, when New York, followed by other states, attempted to claim that affiliate programs like the one popularized by Amazon were enough to constitute a physical presence.
The Senate bill would make the debate over physical presence irrelevant. However, far from simplifying matters, it would introduce a new, even more convoluted structure, forcing retailers to navigate the tax codes of states where they have no real business interests. To get permission under the bill to collect tax from out-of-state companies, states must either join the Streamlined Sales and Use Tax Agreement or implement a set of “minimum simplification requirements” outlined in the bill itself. However, even the Streamlined Sales and Use Tax Agreement has had only minimal success in harmonizing the various states’ myriad rules about what goods and services are to be taxed and how taxes are to be remitted.
Internet behemoths like Amazon have abruptly become supporters of the Senate legislation, after fighting similar efforts for years. Amazon has warehouses and other facilities in a growing number of states, requiring it to collect taxes in those locales where smaller rivals are exempt. It also has the internal resources to comply with the demands of dozens of taxing jurisdictions; smaller sellers do not. The Senate bill’s small seller exception applies only to companies with less than $1 million in annual out-of-state sales, meaning that many small businesses would still be subject to the law.
While the Senate bill would stop debates over the “physical presence” of sellers, it would introduce a whole new set of questions about the physical locations of buyers. According to the bill, the state of the buyer will be determined by “the location where the product or service sold is received by the purchaser.” That’s fine if the product is a box of pens or a packaged DVD. It’s less useful if the “product” is a subscription to Netflix’s Instant View program or the services of a tax professional who electronically files the seller’s returns in many states around the country.
Forget tax fairness. You could call this legislation the Law of Unintended Consequences. Local stores only have to worry about the tax rules in their own locale; the Senate legislation will saddle sellers in places like Muskogee, Okla., with the burden of knowing tax rules and responding to tax audits in places like Bismarck, N.D., and Augusta, Maine.
When things get messy enough, someone will start looking for new solutions. One possible avenue would be for the federal government to take over the task of collecting sales taxes across state lines, with uniform rules and procedures established by the Internal Revenue Service. Of course, once the IRS is in the business of collecting sales taxes, expect it to rake off a share for Uncle Sam, too. That’s not a prospect that will make too many consumers happy.
The Supreme Court might also step back into the fray. The Senate’s legislation was made possible because the Quill court found that turning out-of-state businesses into unwilling tax collectors is allowed under the Due Process clause. That holding predates the Internet, which made it possible to solicit multi-state sales simply by putting up a website. The Court might revisit this concept in a future case that seeks to restore the National Bellas Hess rule. I don’t think the current justices are highly inclined to do this, but a future set - one more attuned to the complexities and opportunities of online life - just might.
Of course, all of that is a long way off. It may still be years before we know where Quill Corp. v. North Dakota will take us. But in the more personal battle between out-of-state retailers, the Supreme Court and the one-time North Dakota Tax Commissioner who is now a senator, Heidi Heitkamp has finally won a round.
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