Will There be a Kill Quill, Vol. 2?

  • April 23, 2018

What a difference a day can make.

As oral arguments in South Dakota v. Wayfair concluded on April 17, it was clear that a U.S. Supreme Court reversal of its 1992 Quill Corp. v. North Dakota ruling was not necessarily a sure thing, as many had expected leading up to the case.

The arguments raised several crucial questions – especially regarding sales and use tax policy concerning e-commerce transactions – that likely will pose ongoing challenges for state and local tax authorities, as well as e-commerce sellers and buyers, regardless of how the Supreme Court rules in what has been billed as the “tax case of the millennium.”

After meeting in conference to discuss Wayfair’s oral arguments, the Supreme Court Justices have already voted on a decision. The case will now be assigned to a Justice to draft an opinion, which should be finalized and released sometime this June.

As I noted in a recent post, the Supreme Court’s overturn of the Quill precedent would trigger major changes and uncertainties for online sellers of all sizes as they scramble to register and comply with state sales tax requirements. However, last week’s oral arguments made clear that a number of uncertainties require clarification, including the following questions:

  • What is a reasonable threshold for economic nexus? South Dakota’s challenged law sets a threshold for economic nexus at $100,000 in annual sales or 200 annual transactions; online sellers exceeding either figure (in South Dakota) must collect and remit sales tax. However, the idea that a single transaction – essentially, a “one-sale rule” – could trigger economic nexus was raised in response to a Justice’s line of questioning. While South Dakota’s thresholds were generally seen as reasonable, a one-sale rule would likely impose overwhelming tax compliance burdens on many small online retailers.
  • How will retroactivity be handled? Although the South Dakota law does not call for the state to collect past (or retroactive) sales tax, not every state currently offers retroactivity protection. If Quill is overturned, some states could conceivably require online sellers to collect and remit sales tax on transactions that occurred within the past decade. One would hope the states would simply acknowledge that Quill has been the law for 26 years and would see retroactivity as being fundamentally unfair.
  • What, precisely, is the burden of sales tax collection and remittance? Justice Stephen Breyer chided both sides for not providing concrete estimates of the cost of compliance and more tangible descriptions of what processes and technology are needed to satisfy compliance in each state. A cloud-based solution is the best avenue for e-commerce retailers that currently have no reporting capabilities. Large and midsize companies which currently sell remotely into jurisdictions where they are not collecting and reporting will need to review their need for additional resources of tax reporting software, hardware and possibly tax professionals.
  • Will states get more aggressive with sales and use tax reporting requirements? If the Court decides against overturning Quill, it is highly likely that states will continue to press the outer limits of the physical presence test, which has clearly been the pattern over the past years. While Congress can create new legislation to address online sales taxation at any time, it has failed to do so for decades, despite strident appeals from states and bricks-only retailers. Quill does not prevent states from requiring online sellers to report transactions to tax authorities so that they can collect use tax from consumers. (See Direct Marketing Association v. Brohl – US Supreme Court)

As I stated above, the precise nature of the differences and impacts in which April 17’s oral arguments will result will not be known until one day in June. Until then, online retailers should take a close look at their current compliance practices, as well as evaluate supporting technology and personnel needed to collect and remit sales tax.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.

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Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

Chief Tax Officer, Transaction Tax

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.

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