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Main Street Fairness: Different Story (& Timeline) If ND Had Won In Quill

author photo of Annette Nellen

Earlier this year, I thought we would likely see some version of a "Main Street Fairness" legislation enacted by Congress.  More attention was being paid to the bills by the media and Amazon stepped forward to endorse one of the bills (S. 1832). And with the federal government in bad financial shape, I thought that when states sought federal funds this year, Congress would pass one of the bills and then tell the states to go get the $26 billion they said they were missing from remote sales.

But, it now seems that the opposition has accelerated with at least one more group formed to opposed the bills. For a good summary and "feel" of the opposition, see this 7/30/12 letter from the American Catalog Mailers Association. Also, there seems to be more active debate on the size measure for "small" vendors who would be exempt from collection in states where they have no physical presence. Questions also persist on whether the bills call for sales taxes to be simplified enough (hey, I raised that question here earlier (see 7/26/12 post)), and even whether this is a new tax. Some argue that it is a new tax due to how and who it is imposed upon in that the legal obligation for paying the tax shifts from the consumer to the retailer and there are added costs of collecting it, making it seem like a new tax to the collector.

While we can't change history, I think things would have been much different today if 20 years ago, Justice White had been able to sway at least four of his fellow justices to affirm the North Dakota Supreme Court ruling (N.D v. Quill Corp., 470 NW2d 203 (ND SCt 1991)) in favor of North Dakota. Justice White viewed the 4-factor test of Complete Auto Transit as incorporating both Due Process and Commerce Clause considerations. He did not agree with the majority view that these were distinct determinations. He also agreed with North Dakota that times had changed and that "in today’s economy, physical presence frequently has very little to do with a transaction a State might seek to tax." (504 U.S. 328)

Justice White also noted a flaw in the physical presence perspective for nexus in that it did not consider the degree if activity. He stated: "Under the majority’s analysis, and our decision in National Geographic, an out-of- state seller with one salesperson in a State would be subject to use tax collection burdens on its entire mail-order sales even if those sales were unrelated to the salesperson’s solicitation efforts. By contrast, an out-of-state seller in a neighboring State could be the dominant business in the putative taxing State, creating the greatest infrastructure burdens and undercutting the State’s home companies by its comparative price advantage in selling products free of use taxes, and yet not have to collect such taxes if it lacks a physical presence in the taxing State. The majority clings to the physical-presence rule not because of any logical relation to fairness or any economic rationale related to principles underlying the Commerce Clause, but simply out of the supposed convenience of having a bright-line rule." (504 U.S. 328-9)

Justice White further described the physical presence standard as creating an "interstate tax shelter" for mail order companies. (504 U.S. 329)

Finally, Justice White questioned whether physical presence was truly a bright-line test. He noted something which has proven to be true, although the majority thought he was way off - Justice White stated: "the vagaries of “physical presence” will be tested to their fullest in our courts." (504 U.S. 331)

I suggest that if North Dakota had won at the U.S. Supreme Court level, Congressional action would have occurred soon thereafter. Consider that the main reason why Public Law 86-272 was enacted in 1959 on income tax nexus for multistate businesses that sell tangible personal property, was Minnesota's victory in Northwestern Cement v. Minnesota, 358 US 450 (1959). Congress was concerned that the ruling would lead states to become more aggressive in taxing interstate commerce. Within 7 months of the ruling, we had P.L. 86-272! (For background on this topic, please visit my 50th Anniversary of P.L. 86-272 website.)

Of course, we can't change history, but I thought I'd just throw out this conjecture in light of Quill's 20th anniversary this year and the continued saga on finding the federal solution to sales/use tax collection by remote vendors.

What do you think?

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

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