Supreme Court Signals Possible Change to Physical Presence Test for Sales/Use Tax Nexus | Wisconsin Tax Law Blog | Bankruptcy Lawyer | Tax Attorney | Wausau | Krautkramer & Block LLC Law Firm

Supreme Court Signals Possible Change to Physical Presence Test for Sales/Use Tax Nexus

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On March 3, 2015, the United States Supreme Court issued an unanimous decision in the
Direct Marketing Association v. Brohl, 575 U.S. ______ (2015). The Direct Marketing Association had filed suit in the United States District Court for the District of Colorado in 2013 arguing that state legislation requiring retailers to file reports the Department of Revenue about sales of tangible property to state residents, even if the retailers were not required to collect sales tax from these customers, violated both the United States and Colorado Constitutions. The Supreme Court ruled that the Tax Injunction Act (TIA)(§28 U.S.C. 1341), which states that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law,” did not bar the suit. (§28 U.S.C. 1341.) The required reports were determined to be an information collecting phase of tax administration prior to "assessment, levy or collection", and therefore not subject to the TIA.

The interesting development in this case was not contained in the main decision, but rather appeared in one of the concurring decisions which accompanied the ruling. However, in order to appreciate what was said in that concurrence, it is necessary to provide a little background information on the Supreme Court's jurisprudence on a state's ability to require retailers to collect sales or use tax from parties in interstate commerce.

The Supreme Court established the requirement that a retailer have a physical presence in a state before it could be required to collect use tax from purchasers in its 1967 decision in
National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753. The court determined that while the use taxes were still due, the state would have to collect them from its resident purchasers and not the out-of-state retailer. In 1992 the Supreme Court reaffirmed this ruling in its more famous Quill Corp. v. North Dakota decision, which stated that vendors who had no physical presence in a State did not have the “substantial nexus with the taxing state” necessary to impose tax-collection duties under the Commerce Clause. 504 U.S. 298, 311-313.

This line of cases is codified in the Wisconsin Statutes at sections 77.53 and 77.51, which state in relevant part that:

77.53(3) Every retailer engaged in business in this state and making sales of tangible personal property or taxable services for delivery into this state...shall, at the time of making the sales...collect the tax from the purchaser...


77.51(13g) …"retailer engaged in business in this state"...means any of the following:

(a) Any retailer owning any real property in this state or leasing or renting any tangible personal property located in this state or maintaining, occupying or using, permanently or office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business in this state.

(b) Any retailer having any representative, agent, salesperson, canvasser or solicitor operating in this state under the authority of the retailer...for the purpose of selling, delivering or the taking of orders for any tangible personal property or taxable services.

The interesting thing to note is that three justices joined the Quill Corp. decision in a concurring decision solely on the grounds of stare decisis - the principle that the court should abide by precedents set forth in its previous decisions. Justice Scalia wrote the concurring opinion, which was joined by Kennedy and Thomas.

Returning to the Court's
DMA v. Brohl decision earlier this year, we find that Justice Kennedy issued a concurring opinion. While he notes that he completely agrees with the opinion of the court, he indicates that he felt compelled to author a separate statement concerning what he felt was now an impermissible burden being placed upon the states ability to collect taxes.

There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, “interstate commerce may be required to pay its fair share of state taxes.” This argument has grown stronger, and the cause more urgent, with time. When the Court decided
Quill, mail order sales in the United States totaled $180 billion.But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States. (Internal citations omitted.)

The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.

575 U.S. ____. He goes on to note that technology has changed how consumers shop.

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront...Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term. Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in
Quill. Id.

After earlier drawing attention to the fact that the
Quill decision had relied upon the three concurring justices (himself included) solely on the grounds of stare decisis, he concludes by inviting parties to bring a case to challenge the established law.

A case questionable even when decided,
Quill now harms States to a degree far greater than could have been anticipated earlier. See Pearson v. Callahan, 555 U. S. 223, 233 (2009) (stare decisis weakened where “experience has pointed up the precedent’s shortcomings”). It should be left in place only if a powerful showing can be made that its rationale is still correct. The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.

So, what is the likely impact of Justice Kennedy's remarks on Wisconsin's use tax law? In the short term, nothing will probably change. The Department of Revenue did not comment upon the decision in either its March 2015 Sales and Use Tax Report (Issue 1-15) or the April 2015 Wisconsin Tax Bulletin (Number 188), and it does not appear that there is any pending legislation related to changing Wisconsin's nexus rules. However, it is only a matter of time before a state challenges the status quo, moving to collect additional use tax revenue based upon Justice Kennedy's open invitation. The real question is where the other justices on the Court stand on this issue. It must be noted that Kennedy's concurring decision was not joined by any other members of the Court, and while he is still an important swing vote (just as he was in the Quill decision) he cannot change the law on his own.

A slip copy of the Court's full decision in the DMA case can be found here.:

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