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High Court Has The Ball: State Digital Tax Cases Slowing Down

Jan. 26, 2018, 6:00 PM

The U.S. Supreme Court’s decision to revisit its 26-year-old rule limiting states’ taxing authority over remote retailers might bring to a halt the slew of state cases challenging that ruling.

South Dakota became the first state to have its case reach the high court, contesting the 1992Quill Corp. v. North Dakotadecision that prohibits states from imposing tax collection obligations on vendors without a physical presence in-state.

Heeding calls from traditional retailers and dozens of states, the Supreme Court granted review Jan. 12 of the state’s contention that Quill is obsolete in the e-commerce era and should be overturned. The case arises from the South Dakota Supreme Court’s decision invalidating the state’s digital sales tax statute S.B. 106 (S.D. Codified Laws Chapter 10-64) as unconstitutional under Quill.

Similar cases are pending in Alabama, Indiana, Tennessee, Virginia, and Wyoming. But individuals familiar with the litigation said that those cases may pause while state officials and tax professionals await the Supreme Court’s decision in the South Dakota dispute.

Below is a snapshot of where each “kill Quill” case stands.

Alabama: Stay Coming?

Alabama was one of the first states to announce sales tax collection duties for out-of-state sellers based solely on economic nexus, in this case annual sales into the state of $250,000. The revenue department regulation took effect in January 2016, a few months after the state’s governor publicly invited a lawsuit over the issue.

Online retailer Newegg Inc. contested a revenue department assessment at the Alabama Tax Tribunal in 2016, arguing it couldn’t be forced to collect Alabama sales tax since it lacked a physical presence. In a December 2017 brief, Newegg argued the state doesn’t have the authority to force companies with no in-state physical presence to collect sales tax unless the U.S. Supreme Court overturns Quill.

However, that litigation “may be likely to be put on hold,” Joe W. Garrett Jr., deputy commissioner for the Alabama Department of Revenue, told Bloomberg Tax.

No motions or orders to stay the case have been filed yet, Garrett said. But he said it seems logical the tax tribunal and parties might want to stay the case until the Supreme Court rules “to see if it controls Newegg, and it’s likely that it might.”

The Alabama case has moved at a much slower pace than the South Dakota litigation, despite Alabama’s regulation taking effect a few months before the South Dakota law. Once the Alabama Tax Tribunal rules in the case, it must pass through as many as three more layers of state courts before being ripe for Supreme Court review.

‘Not Proceeding Quickly’

Bruce Ely, a Birmingham, Ala.-based tax attorney with Bradley Arant Boult Cummings LLP, agreed that a stay of the case makes sense while awaiting a Supreme Court decision.

The Alabama “case is certainly not proceeding quickly,” said Ely, who’s not involved in the litigation. “One or both parties may very well request a stay now.”

But a change in federal law could impact Alabama’s Simplified Sellers Remittance Program, which lets out-of-state sellers voluntarily agree to collect and remit tax at a flat rate of 8 percent, Ely said. The program has been very successful at bringing in uncollected sales and use tax from e-commerce, largely because Inc. agreed to join the program, he said.

However, Alabama law requires that the program permanently close to new participants if a change in federal law occurs via congressional action. Companies that were enrolled in the program six months before a federal law change would be grandfathered in.

“If I were a non-nexus vendor considering this program, I’d be reviewing the guidelines very quickly,” he said. A near-term Supreme Court ruling or even the court’s acceptance of the South Dakota case could inspire Congress to act on Quill, Ely said. Indiana: Couple of Complaints

There’s been little movement in the Indiana case since a complaint was filed in June 2017 by Washington-based NetChoice and the American Catalog Mailers Association (ACMA), asking an Indiana trial court to strike down House Enrolled Act 1129. The statute requires out-of-state retailers to collect and remit Indiana sales tax if those sellers have 200 or more transactions in the state or sell $100,000 or more in-state.

The state Department of Revenue turned the tables and filed in August 2017 a third-party complaint against both Wayfair Inc. and Inc. for failing to pay Indiana’s 7 percent sales tax under the law.

Steve DelBianco, executive director of NetChoice, previously told Bloomberg Tax in September 2017 that he was “confident that the court would grant an injunction barring enforcement of the Indiana law, just as a South Dakota court did in March by invalidating a nearly identical law there.”

Tennessee: Will Need Legislative Approval

The Tennessee Department of Revenue issued a rule in October 2016 requiring remote retailers with at least $500,000 in annual sales to begin collecting and remitting sales taxes by July 2017. However, implementation of the rule was blocked by a state Chancery Court order and subsequently by the state Legislature before collections began. After an administrative challenge failed, NetChoice and the ACMA filed the lawsuit, which is currently in the discovery phase. Brett R. Carter, a partner with Carter Shelton PLC in Nashville, told Bloomberg Tax that the parties are engaged in a dispute over the identity of the members of the groups challenging the regulation. NetChoice and ACMA represent e-commerce and catalog merchants.

“Because the progress in the Tennessee case slowed and the U.S. Supreme Court has now granted cert” in the South Dakota case, it’s likely that the associations will want their lawsuit held pending a high court decision, Carter said. Discovery filed by the Tennessee Attorney General’s Office, which is representing the state DOR in the case, “suggests that they were pursuing procedural grounds to seek a dismissal,” he said.

Even if South Dakota prevails before the Supreme Court, a 2017 state law requires the Tennessee Legislature to give its approval before the rule is enforced, according to Carter. However, the Legislature has been reluctant to enact such a statute and is unlikely to do so before the November 2018 elections, Carter said.

Virginia: ‘Delicious Irony’

Crutchfield Corp., a consumer electronics and automotive parts retailer, is challenging in Virginia state court a Massachusetts regulation 830 CMR 64H.1.7 that orders online vendors to collect state sales tax if they use in-state apps and “cookies” on customers’ computers. Online vendors also must collect sales tax if they make 100 or more individual transactions and exceed $500,000 worth of in-state sales in a year.

According to lawyers familiar with the case, the state Department of Revenue filed in December 2017 a motion to dismiss for lack of personal jurisdiction, but hasn’t filed a supporting memorandum. The case hasn’t been scheduled for a hearing.

“It’s a delicious irony how Massachusetts argues that a Virginia court lacks jurisdiction over the Massachusetts DOR, while at the same time claiming their DOR has tax jurisdiction over Virginia retailers who lack any physical presence in Massachusetts,” DelBianco said.

Wyoming: Dueling Cases

In Wyoming, its law (H.B. 19) requiring remote sellers to collect and remit sales taxes isn’t being enforced while a court case is pending. Mirroring South Dakota’s statute, H.B. 19 requires remote retailers to collect and remit sales taxes if they have more than $100,000 in aggregate transactions or more than 200 transactions with Wyoming consumers.

While the state is suing Newegg,, and Wayfair for failing to comply with the law, NetChoice and the ACMA are suing the state over the constitutionality of H.B. 19.

Matthew Schaefer, a partner with Brann & Isaacson and counsel for the remote retailers, told Bloomberg Tax that while neither of the cases have gained ground, Wyoming’s efforts could be diminished if the high court codifies Quill‘s precedent.

“There has been no further action or development in either of the pending Wyoming matters,” Schaefer said. “A ruling by the Supreme Court in Wayfair affirming the South Dakota Supreme Court would signal the invalidity of the Wyoming statute, because of the similarity between the laws. It is not possible to determine the effect of any other ruling by the Supreme Court in Wayfair.”