“The states are left to their own devices to deal with their eroding tax bases.”
Those words, which appeared in an article in the Journal of Multistate Taxation and Incentives this month might as well be heard as a battle cry among catalogers and online retailers. Authored by two members of the Alabama Department of Revenue, the piece lauds the efforts of the state and its tax commissioner Julie Magee to challenge the three-decade-old Quill v. North Dakota Supreme Court decision requiring that sellers have a physical “nexus” in a state before they can be taxed there. The court in Quill called on Congress to ultimately decide the issue, Congress never did, and the digital economy has since served to “make the physical presence rule exponentially more burdensome on states,” the article stated.
In January, Magee and Alabama initiated the unburdening process. They began enforcing a rule that called for taxes to be collected and remitted by all out-of-state sellers totaling $250,000 or more in retail sales to residents in 2014. Other states including Louisiana, Nebraska, and Utah have similar measures drafted and ready to go, waiting for Magee’s legislative broadside to be answered.
“Ultimately, somebody’s got to sue them or they’re going to sue somebody. Alabama is clearly making a direct challenge to a Supreme Court precedent,” says Hamilton Davison, president and executive director of the American Catalog Mailers Association. Davison began rallying his members—all of whom sell across the 50 states—before New Year’s, soliciting donations to establish a legal fund for the inevitable Alabama face-off.
Davison submits that Alabama and Magee are out to test a “suspect” legal theory, that of replacing the physical presence taxation mandate with an “economic presence” standard for remote sellers. In a recent op-ed piece in The Wall Street Journal, Davison wrote that catalogers and online retailers have but three options: Obey the law and remit the taxes, disregard it and face audits and assessments, or stop selling products to Alabamans.
There is a fourth option—to prepare for a legal battle—and that might figure to be the wisest course in light of the one laid out for states in the taxation journal article. It says states have been emboldened by an opinion written last year by Supreme Court Justice Anthony Kennedy in a case that, ironically, was a huge victory for direct marketers. In DMA v. Brohl, the Direct Marketing Association won the right to redress in federal court a law instituted by Colorado to collect taxes on out-of-state sales. Justice Clarence Thomas wrote the lead opinion, but in his concurring opinion, Kennedy freelanced the idea that “Quill’s physical presence standard has placed burdens on states that have resulted in [harm to the] states to a far greater degree than could have been anticipated earlier.”
In the conclusion of their Multistate Taxation article, authors Joe Garrett Jr. and Christy Olinger Edwards—respectively, the deputy commissioner and assistant counsel of the Alabama Department of Revenue—made plain their state’s intentions to un-shoulder Quill’s burdens and rally other states to their cause.
“We are hopeful other states will join in Alabama’s effort to expand nexus and push back against Quill, and we applaud those states that have pioneered the cause. The current standard has fallen short, and [precedent] should give way to crafting a standard that is more appropriate in today’s economy,” Garrett and Edwards wrote. “Alabama has patiently waited for Congress to give states relief from Quill’s harsh effects and Alabama will not sit idly by any longer.”
Now the question is, how much longer will marketers sit idly by?
