Two Midwest states join South Dakota with ‘Kill Quill’ laws; goal is to collect remote sales taxes
A quarter-century has passed since a U.S. Supreme Court decision limited the ability of states to collect taxes from the remote sales of out-of-state retailers. Legislators wanting to secure that taxing authority — which they say is critical to maintaining state revenue bases and helping brick-and-mortar businesses — believe a reversal of Quill Corp. v. North Dakota may finally be on the horizon.
“I do believe Quill will get overturned; it’s just a matter of time,” North Dakota Sen. Dwight Cook says. And one of the U.S. states most reliant on the sales tax as a revenue source, South Dakota, might bring the case that “kills Quill.”
A year ago, South Dakota lawmakers passed a bill requiring most retailers without a physical presence in the state to remit the state’s sales tax. SB 106 applies to sellers with 200 or more annual transactions in South Dakota or whose gross revenue from sales in the state exceed $100,000. This year, Indiana (HB 1129) and North Dakota (SB 2298) passed “economic nexus” laws of their own.
The South Dakota law was immediately challenged and is currently in the hands of the state Supreme Court — but maybe not for long. Sen. Deb Peters, the sponsor of SB 106, hopes justices in her state send the case to the U.S. Supreme Court, perhaps in time for Quill to be re-examined during its next term.
Language in the final version of SB 106 makes clear the high stakes surrounding Quill for South Dakota, a state that has no income tax and relies on sales taxes for more than half of its revenues. The measure also references the words of U.S. Supreme Court Justice Anthony Kennedy in a 2015 opinion.
“It is unwise to delay any longer a reconsideration of the court’s holding in Quill,” Kennedy wrote, noting both “the dramatic technological and social changes … in our interconnected economy” and a “startling revenue shortfall in many states.”
The U.S. Supreme Court’s newest justice, Neil Gorsuch, also has argued that the Quill decision should be revisited, The Hill reported in May.
“At this point, my bet is that the court will deal with this before the U.S. Congress does,” says Stacy Mitchell, co-director of the Institute for Local Self-Reliance. That is not only because of Congress’ busy legislative agenda this year, she adds, but because of its history of inaction on this issue.
‘Ultimate goal’ is congressional action
In its 1992 decision, the U.S. Supreme Court said Congress has the authority to decide “whether, when and to what extent” states can compel out-of-state sellers to collect sales and use taxes. “The ultimate goal is to get Congress to act,” Peters says, because the federal legislation would provide the direction that states need to move forward with tax collections in an orderly way.
In April, bipartisan bills were once again introduced in the U.S. House (H.R. 2193) and Senate (S. 976). Under these proposals, states meeting one of two criteria could compel remote sellers to collect sales and use taxes: 1) The state is a member of the Streamlined Sales and Use Tax Agreement, or 2) The state has adopted minimum simplification requirements as outlined in the federal legislation.
States waiting, and acting
Ten of the 11 Midwestern states (all but Illinois) already have passed legislation conforming to the Streamlined Sales and Use Tax Agreement. By providing more administrative uniformity among states and using new software and technology, the multistate agreement simplifies sales and use tax collections for retailers, particularly those operating in multiple states.
The U.S. Senate passed a version of the Marketplace Fairness Act in 2013, but the legislation stalled in the House. “Every year, we are constantly working with members of Congress to get this done,” Peters says.
Opposition has come from members who view the legislation as a tax increase or who prefer a different approach than that proposed in the Marketplace Fairness Act — for example, basing the sales tax on the location of the seller rather than the buyer and requiring states to have a single rate for all remote sales.
Even minus federal action, states have taken steps to improve tax collections from remote sales.
One common approach has been to require sales tax collections by an online retailer who has some kind of “physical presence” in the state, including in-state sales “affiliates” who sell products via the retailer’s’ website.
Most recently, the Massachusetts Department of Revenue directed large, out-of-state Internet vendors to begin collecting and remitting the state’s sales or use tax. Its argument: All of these vendors have an “in-state presence” because of the very nature of how remote sales take place. These transactions involve software downloaded to the devices of Massachusetts customers and the “cookies” (data text files) stored on these in-state devices.
In the 1992 Quill case, the U.S. Supreme Court decision was based on the mail-order sales of office equipment and supplies from a Delaware company to customers North Dakota. “The landscape is entirely different today than it was back then,” Cook says.
Proposals to expand sales tax base stall in Nebraska and Ohio
Illinois, Nebraska and Ohio are among the states this year where legislators have considered plans to expand the reach of their sales tax systems, but as of early May, none of the measures appeared close to passing. These proposals would capture more of the economic activity in a state’s service economy. They can be used as way to boost state revenue or as part of broader plans to cut taxes in other areas.
Ohio Gov. John Kasich has proposed reducing the state’s income tax rate. To pay for it, he wants to raise the rate of the sales tax (from 5.75 percent to 6.25 percent) and add several services to the base — for example, cable subscriptions, travel services, and cosmetic surgery that is not medically necessary. However, a budget approved by the Ohio House in early May did not include Kasich’s proposed changes, according to the Dayton Daily News.
Nebraska’s LB 452 calls for taxing a host of services: dry cleaning and laundry; taxi and limousine transportation; tanning; and hair, nail and skin care. The bill, which also would reduce individual and corporate income tax brackets, failed to advance out of committee this session.
In Illinois, discussions over a “grand bargain” to solve the state’s long-standing budget problems have included expanding the sales tax base to include landscaping, personal care services, cable television and building repairs, Crain’s Chicago Business reported in May.
The extent to which services are taxed varies widely among the 50 states. In its most recent nationwide analysis, the Federation of Tax Administrators found that South Dakota taxed 146 different services. That is far more than any other state in the Midwest. Iowa was taxing the second-highest number of services (94), the FTA analysis found, while Illinois was capturing the smallest number of services (17) in its sales tax base.