It is hard to believe we are more than halfway through 2014. What is not surprising is that states continue to battle with online companies, such as Amazon, as to whether it should be required to collect and remit sales tax. States continue with aggressive tactics and continue to look to distribution centers, affiliates, or even hard drives as a hook to establish nexus, which would require the company to collect and remit tax in that state.
In 1992, the Supreme Court of the United States heard a case called Quill v. North Dakota. In announcing the supreme law of the land, the Supreme Court ruled that a company has to have some physical presence in a state to have sales tax nexus. In other words, in order for a state to force a company to charge, collect, and remit its tax then the company has to have a warm body (an employee or independent contractor), or property (inventory) or something physical within the state’s borders. With no change in the law states slowly but surely have widdled away at this case.
Recently, at the end of 2013, the Supreme Court of the United States declined to hear New York’s Overstock.com and Amazon.com case. In essence, the New York “Amazon law” changed the definition of a vendor in New York and forced many out-of-state online retailers to charge, collect, and remit New York Tax. With the New York case off the map, a recent Colorado case has dominated the State and Local Tax (“SALT”) community.
In 2010, the state of Colorado enacted a law that affected a “non-collecting retailer.” If a company made sales in Colorado over $100,000 and it did not have nexus it had to provide notices to Colorado purchasers, send annual purchase summaries to the customer and send the report to Colorado. However, going back to Quill, can a state force an out-of-state company to do anything within its state? Pursuant to Quill, I would argue that a state cannot.
Apparently, Direct Marketing Association (“DMA”) agrees with my view and challenged the Colorado law in federal court. DMA is a group of businesses and organizations that markets products using advertisements, the internet and catalogs. At trial, the DMA convinced the trial court that this law was impermissible. Specifically, DMA successfully argued that Colorado’s law discriminated against interstate commerce and placed an undue burden on interstate commerce.
Colorado was unhappy with this decision to say the least and appealed the ruling to the 10th Circuit Court of Appeals. After all, Colorado estimates that its residents do not remit some $172.7 million of use tax on e-commerce purchases. In play is the Tax Injunction Act (“TIA”) which is a federal law that says a federal court must defer to a state court in a state tax case. As such, the appellate court lacked the power (also called “jurisdiction”) to hear the case to begin with. Therefore, the 10th Circuit Court of Appeals reversed the ruling and did not discuss the merits of the case.
On July 1, 2014, the Supreme Court of the United States announced it would hear the appeal now brought by DMA. Specifically, the Supreme Court will look to whether a federal court can hear a constitutional challenge to a state tax. A representative of DMA summarized its argument by stating:
It is vital that businesses have the ability to access federal courts when challenging state actions that interfere with the Commerce Clause. Federal courts are by definition expert in constitutional issues and the proper neutral arbiters through which businesses can challenge states in which they have no physical presence. Today’s announcement by the U.S. Supreme Court is a huge step toward ensuring that every business in America enjoys the full judicial access provided by the U.S. Constitution.
The SALT community will closely monitor the status of the case in the coming months. If successful, it may give companies a federal avenue to challenge the constitutionality of state tax laws. Often times, businesses believe a state court will show bias to a state law, and a federal court may take a more neutral approach.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390..