Sales and use taxes are some of the most stable and reliable as a revenue stream – with aggregate national collections only falling during periods of significant economic downturn such as the recession of 2008.
Historically, state budgets have relied heavily on sales and use taxes, emphasized by the fact that aggregate sales and use tax collections account for over 30 percent of total state tax revenues. Not surprisingly, states have attempted to expand sales and use tax collections by increasing rates (often unpopular and unsuccessful with voters), expanding the sales tax base to professional services and other traditionally exempt items, increasing “sin taxes” (sales taxes on cigarettes and alcohol), requiring use tax notification and reporting of remote seller sales, and pushing the boundaries of traditional sales and use tax nexus concepts.
Concerning the latter, states have enacted new sales and use tax nexus laws in response to the changing digital economy (and tax revenue lost due to remote commerce) through concepts such as “click-through nexus,” so-called “cookie nexus,” and employing broader applications of affiliate nexus. Most significantly, however, states have begun to directly challenge the physical presence nexus standard laid out in the 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota.
In his concurrence to the U.S. Supreme Court’s 2015 opinion in Direct Mktg. Ass’n v. Brohl – a case out of Colorado challenging use tax reporting requirements – Justice Kennedy concluded that the combination of tax loss from individual purchase use tax non-compliance and far-reaching systemic and structural changes in the economic and social activities wrought by the expanding use of the internet were indicative of a need for the court to revisit the Quill physical presence. Kennedy called for the states to provide the court with a case suitable to address whether the rationale in Quill is still viable in the modern world. The states quickly moved in response.
What Was Quill?
Quill Corporation was a mail-order distributor of office equipment and supplies that maintained a physical presence in California, Georgia and Illinois. Quill sold its products into North Dakota through ads, catalogs and telemarketing, but maintained no locations, warehouses, employees, or other property in the state – essentially no physical presence.
About Brian Kirkell and Mo Bell-Jacobs
Brian Kirkell is a principal and Mo Bell-Jacobs is a manager at RSM US LLP. They are leaders in the firm’s Washington National Tax practice, focusing on state and local tax issues.