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February 3, 2016
Getting to Quill: The Path to Overturning an Outdated Supreme Court Decision
by Eric Yauch

Full Text Published by Tax Analysts®

Two years before was founded, the U.S. Supreme Court created a barrier that would block states from collecting what would eventually become billions in sales taxes from e-commerce.

State attempts to work around the 1992 Quill Corp. v. North Dakota decision have failed, and multiple efforts are now well underway to bring a direct challenge to it, spurred by frustration over congressional inaction on the Marketplace Fairness Act (MFA) and an invitation from a Supreme Court justice last term.

Justice Anthony M. Kennedy, in a concurring opinion in Direct Mktg. Ass'n v. Brohl (DMA), said that as the national economy changes, so should the law, pointing out that mail order sales in 1992 totaled $180 billion nationwide but as of 2008 e-commerce sales totaled $3.16 trillion. Kennedy said it was "unwise" to delay any longer a reconsideration of the Court's decision in Quill.

While there is no guarantee that the Court will eventually revisit Quill, states have a number of paths to get back to the high court.


In Quill, a Delaware corporation with offices and warehouses in Illinois, California, and Georgia challenged a North Dakota law requiring it to collect and remit use tax on equipment and office supplies it shipped to the state. The Quill Corp. had no offices or employees in North Dakota and argued that the state statute violated the bright-line test espoused in the Court's 1967 decision in National Bellas Hess Inc. v. Dep't of Revenue of Ill., which held that under the due process and commerce clauses, a retailer had to have a physical presence in a state before it could be forced to collect and remit sales and use tax to that state.

The majority in Quill acknowledged the changes in the economy since it decided Bellas Hess but ultimately upheld the bright-line, physical presence test for sales and use tax.

The Court did, however, overrule the Bellas Hess holding that due process precluded a state from imposing a sales and use tax on a retailer without a physical presence. The Court noted that in the 25 years since Bellas Hess, its due process decisions had evolved substantially and held that if a foreign corporation purposefully availed itself of the economic benefits of a market in a state, it would be subject to in personam jurisdiction even if it had no physical presence in the state.

The Court held that its due process limitations were related to fair notice to taxpayers that they were subject to a state's jurisdiction but the dormant commerce clause had a different function: limiting burdens on the national economy. On the physical presence requirement, the Court held that it "firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes."

Ultimately, the Court said, the commerce clause issue was one that was better suited for Congress to address.

In a concurring opinion, Justice Antonin Scalia, joined by Kennedy and Justice Clarence Thomas (and the only three members of the Quill Court to remain on the Supreme Court today), said that he supported the Court's overruling of its due process holding in Bellas Hess but said that he would not revisit the merits of the commerce clause challenge and instead would uphold the decision based on stare decisis.

Scalia, Kennedy, and Thomas also acknowledged that Congress was capable of changing the standard via statute, saying, "Congress has the final say over regulation over interstate commerce, and it can change the rule of Bellas Hess by simply saying so."

University of Arizona Law School professor John A. Swain said he breaks the decision into three opinions: "stare decisis Quill," "burdens Quill," and "disappearing ink Quill." Swain said the opinion clearly references stare decisis as one of the reasons for upholding the bright-line rule from Bellas Hess but the opinion could not rest entirely on stare decisis because it overruled its due process holding.

"But, clearly, and I think the Court admits this, had they been writing on a blank slate, Quill would have gone the other way," Swain said. He added that the court's substantive commerce clause holding focused on the burden aspect of the decision, saying that the compliance burden on companies was one of the reasons the bright-line standard was upheld.

Swain said that the opinion also has a disappearing ink component, in which the Court said it would uphold the physical presence standard in that case but welcomed Congress to change it and may even overrule its own decision at some point.

"There is a legal standard for when you overrule a prior precedent," Swain said, noting that the Court would look at factual, cultural, and economic changes, reliance interests, and the change in the legal environment. "But the question, of course, is: How much? Things always change, so how much change is enough change?" Swain asked.

Swain added that one could argue that there certainly was technological and economic change between Bellas Hess and Quill -- more people had credit cards, long-distance calls were cheaper, and 1-800 numbers helped facilitate mail orders, for example.

"But those changes pale in comparison to what's going on now with the Internet. Just look at the stock market and the public companies that are involved with this business -- we had none of that in 1992 or 1967. I think a strong argument can be made that this time it really is different, and it's enough this time," Swain said.

The Race to the Court

"The first question is: Would they grant cert?" said Richard Pomp of the University of Connecticut Law School. "If the state loses, I cannot believe the Court will grant cert as long as there is federal legislation pending."

Pomp was referring to the MFA and the Remote Transactions Parity Act of 2015 (RTPA; H.R. 2775), both bills that would address the Quill issue and establish uniform rules for taxpayers required to collect and remit sales tax to states.

In 2013, after more than a decade of deliberation, the Senate passed the MFA (S. 743) by a vote of 69 to 27, but it died in the House. In 2015 Congress passed an extension of the Internet Tax Freedom Act, which bans taxation of Internet access by state and local governments. But even though the MFA was reintroduced in 2015 (as S. 678), it and other sales tax legislation such as the RTPA have failed to gain any traction by federal lawmakers. Predictions of progress by those bills seem bleak.

Pomp added that a decision overturning Quill would normally apply retroactively and would reach companies that choose not to file any returns in Alabama because they thought they were protected by Quill. (See below for discussion of Alabama's new regulation on remote sellers.) Indeed, the retroactivity issue is what led the Supreme Court to invite Congress to intervene, he added.

In 2011 Vermont passed a law (H 436) that would enact click-through nexus for online retailers once 15 other states passed similar laws. On October 13 the Vermont attorney general determined that the threshold had been met and implemented the nexus provision. Calling the law unconstitutional, ended its associates program operating agreement in the state as a result.

And members of the Streamlined Sales Tax Governing Board met in May 2015 to discuss which of the 23 member states would be able to pass a law requiring remote sellers to collect sales tax and which state supreme court could potentially be sympathetic and rule against Quill. The meeting was a result of the board's frustration with Congress over its inability to take any meaningful steps on the pending sales tax bills in Congress.

DMA, Part II?

In its decision in DMA, the Court held that the Tax Injunction Act did not bar a taxpayer from challenging Colorado's use tax notice and reporting requirements in federal court. Colorado law requires taxpayers without a physical presence in the state to report to Colorado the sales it made in-state to assist it in collecting use taxes.

On remand of the case to the Tenth Circuit Court of Appeals on the merits, Colorado Solicitor General Frederick Yarger argued that the taxpayers were asking the court to expand the holding of Quill and argued that the law related to notice and reporting requirements, not the collection and remittance of sales and use tax, which Quill barred.

Arguing for the taxpayer, George Isaacson of Brann & Isaacson urged the court to focus on whether Colorado law treats out-of-state interests differently than it treats in-state interests. If it does, Isaacson said, that would be a per se violation of the commerce clause.

It's safe to assume that the losing party in the case will ask the Supreme Court to hear DMA again, this time on the merits. The Court could accept the case and use it as a vehicle to decide Quill's fate once and for all, or the Court could let the Tenth Circuit's decision stand. Regardless of which side appealed, that would arguably not have an impact on the Court's position on Quill because the case is not a direct challenge, as it relates to notice and reporting requirements.

Ohio's Nexus Dispute

The Ohio Supreme Court is currently considering a challenge to the state's commercial activity tax (CAT), a type of gross receipts tax that establishes taxpayer nexus if a company has more than $500,000 in sales to customers in the state.

Walter Hellerstein, a law professor at the University of Georgia School of Law, said that it's been settled for years that for income tax purposes, a company can have nexus with a state without having a physical presence. But the distinction between sales and use taxes, which are imposed on final consumption and on a transaction-by-transaction basis, and an income tax is clear. A tax applied on general business activity, like Ohio's commercial activity tax, blurs that distinction.

In one of the three CAT cases pending at the state supreme court, Crutchfield Corp. v. Testa, the taxpayer is challenging the economic nexus portion of the CAT under the U.S. Supreme Court's 1987 decision Tyler Pipe Indus. v. Washington Dep't of Revenue . In Tyler Pipe, the Court held that for a taxpayer to have the requisite substantial nexus with a state, it must engage in activities in the state -- either directly or with persons acting on its behalf.

Although the taxpayer argues that Quill is not the controlling Supreme Court precedent in the CAT challenge, it is cited often through both sides' briefs as instructive on the Court's position on nexus under the dormant commerce clause. And in an amicus brief filed by the Buckeye Institute for Public Policy Solutions, the group argued that the physical presence test should be extended to gross receipts taxes to avoid burdening interstate commerce.

"Although there have been significant economic, cultural, and technological changes since Quill, the burden imposed by gross receipts taxes on interstate commerce has not changed," the group said.

Alabama's Direct Challenge

While other states tiptoe around the issue, Alabama has recently taken steps to challenge Quill directly by enacting Regulation 810-6-2-.90.03, which requires remote sellers with over $250,000 of sales into the state per year to collect and remit sales tax. On January 19, Department of Revenue Commissioner Julie Magee sent letters to out-of-state sellers informing them of their obligation to collect and remit sales tax.

The DOR welcomes a challenge to the regulation, hoping that if the issue reaches the U.S. Supreme Court, it will finally have a chance to overrule Quill. Deputy Revenue Commissioner Joe Garrett Jr. said that it's an open question in terms of how the issue gets to court.

"One way to get into court is for a taxpayer, or more likely some group representing taxpayers, to come in and then proactively enjoin the state from enforcing the regulation," Garrett said. "That would be a relatively clean way to get into court," he added.

But if that doesn't happen, Garrett said, the issue will arise in the audit and assessment process. "What we want to do is lose the case very quickly and cleanly in state court to get our cert petition to the Supreme Court," Garrett said. When asked if he thought the Court might decline to hear the case while bills are pending in Congress on the issue, like the MFA and RTPA, Garrett said that could be an issue but in his opinion a decision by the Court on Quill would force Congress to act.

"What the Court has done is make it less likely for Congress to act in this area, and if the Court were to overturn Quill, that might be the thing that would spur Congress to act," Garrett said.

Swain agreed, saying that if the Court got rid of the physical presence test, states would go back to a test that looks an awful lot like due process. "I think the answer would be that most everybody is taxable. And it's a very rare case, a very de minimis situation, where you could argue a violation of the due process or commerce clause once the physical presence test is removed," he said. "Everybody would be in, basically, except for the little guys; and I think there would be concern expressed by taxpayers and then a real chance at congressional legislation if the Court ruled that way."

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