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An Analysis of Quill and Federal Remote Sales Tax Legislation

Posted on July 4, 2016 by Zhang, Yilu

Yilu ZhangYilu Zhang is a student at New York University School of Law. She is currently a summer associate at Ropes & Gray LLP in the Boston office. She would like to thank Professor David S. Miller for his guidance with this paper.

In this paper, Zhang uses the U.S. Supreme Court's findings in Quill as the basis for evaluating three federal bills that would allow states to collect taxes on remote transactions -- concluding that while the measures would address the long-standing issue, they're also flawed.

This paper was selected for publication as part of Tax Analysts' student paper competition.

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While online retail represented only 6.4 percent of all retail sales in the United States in 2014, that percentage has grown 11-fold since 2000, while physical retail grew only 55 percent over the same period.1 Online retail makes interstate purchasing possible in volumes that physical retail cannot, raising questions about states' powers to collect taxes on purchases from outside their borders. Many states have a dual consumption tax regime that captures both sales and use of personal property: a sales tax applied to the purchase of personal property in-state and a use tax applied to property used, consumed, or stored in-state. The use tax therefore allows a state to tax consumption even when the underlying transaction happens beyond its borders.

The U.S. Supreme Court's 1992 ruling in Quill Corp. v. North Dakota limits states to collecting use taxes from remote retailers who have a substantial nexus with the taxing state, and affords Congress the authority to permit states to impose tax obligations on a broader swath of online retail transactions. This paper first examines how the status quo under the Court's rule flouts multiple tax policy goals and warrants reform. Next, it explores and evaluates state and federal efforts to expand remote online taxation.

I. The Quill Status Quo

Quill put forth the existing substantial nexus threshold, which establishes when states may impose obligations on out-of-state retailers to collect use taxes on consumer transactions with in-state destinations.

On the one hand, a state's authority to tax or to subject a foreign entity to its power (that is, to collect a tax on its behalf) is bound by the due process clause. In Quill, the Court applied due process through a test of "minimum contacts," requiring that a remote retailer avail itself of enough state-provided benefits to be on proper notice -- consistent with notions of "fair play and substantial justice" -- that it may subject the retailer to its jurisdiction.2

On the other hand, the commerce clause imposes a separate and distinct constitutional limitation on states' taxation authority. Under this analysis, the Court is concerned with the extent to which a state's taxation power beyond its borders would "burden interstate commerce," which was the original impetus behind the commerce clause. Therefore, a commerce clause analysis has little to do with how much the foreign entity availed itself of the state's services; rather, it has more to do with curtailing states' potential to distort the national marketplace by favoring their own interests over interstate commerce. The Quill Court adopted the Complete Auto Transit Inc. v. Brady test, which assesses burdens on interstate commerce according to two inquiries: one, whether a fair share of taxation between domestic and interstate commerce is maintained; and two, whether, as a threshold matter, a state's attempted reach encumbers out-of-state retailers to their disadvantage.3 To that end, the Court clarified Complete Auto's substantial nexus requirement: A state may tax and impose tax collection duties on a remote retailer -- consistent with the commerce clause -- if that remote retailer has a substantial nexus (physical presence) in that state.

The Court distinguished that its ruling rests primarily on the commerce clause, not due process -- an important distinction for tax policy purposes. While Congress has no authority to violate due process by passing statutes, it does have plenary power to authorize state actions that may burden interstate commerce.4 The Quill Court also made clear that the substantial nexus threshold for comportment with the commerce clause is higher than the "minimum contacts" test for due process.5 Coupled with Congress's constitutional power to override the dormant commerce clause, the Court qualifies its decision in Quill by pointing out that "no matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions" and by explicitly inviting it "to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes."6

The question is whether Congress wants to disturb the balance of interstate commerce by allowing states to require retailers to collect taxes on remote transactions. Congress should consider the tax policy implications under Quill and determine if its shortcomings outweigh its benefits. And if that is the case, Congress should propose a careful law that alters the Quill taxation regime in a way that better achieves the desired tax policy outcomes.

II. Tax Policy Implications of Quill

The Quill test allows states to compel online retailers with substantial nexus to collect use taxes. The Quill threshold can be evaluated against the five main goals of tax policy: (1) simplicity of the tax; (2) efficiency of the tax; (3) revenue potential of the tax; (4) fairness of the tax; and (5) social goals achieved and thwarted by the tax. Quill 's framework for online retail taxation touches on each goal -- and on balance, tips toward the need for reform.

A. Quill's Simplicity (or Lack Thereof) -- Rule


If an online retailer has substantial nexus, a consumer will simply see a higher price at checkout with the added sales or use tax. The consumer pays the sales tax, and the retailer remits the tax to the state.

From the remote seller's perspective, however, the Quill test is hardly clear from state to state. The irony is that the Supreme Court believed it was setting a helpful bright-line rule for taxing interstate commerce by focusing on physical presence; indeed, while the Court conceded that line-drawing may seem "artificial at its edges," that artificiality "is more than offset by the benefits of a clear rule. Such a rule firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes."7

States' myriad interpretations of the substantial nexus requirement have forced online retailers to parse numerous standards and definitions to determine if they are subject to use tax collection. While the Quill Court contemplated "a small sales force, plant, or office" as examples of physical presence, states have expanded that notion. For instance, all online retailers have websites -- and having a web server in a state counts as nexus in many states; a segment of those states even count leasing an in-state web server from a third party as proper nexus.8

There is also click-through nexus, in which an in-state affiliate of the out-of-state online retailer -- such as a third- party website or telemarketers -- that refers sales to said retailer and receives commission on those sales, establishes a physical presence. Perhaps the most notorious example of the click-through nexus in action is New York's "Amazon" law, which has also been adopted across several other states.9 Overstock.com petitioned the Supreme Court for certiorari in 2013 to contend that the Amazon law "functionally abrogates the physical-presence requirement," but the high court declined to hear the case, maintaining the constitutional viability of the click-through nexus.10

Another factor is trailing nexus, which maintains retailers' in-state legal nexus for a time, even after they have ceased any in-state business activity. There are several general trailing nexus regimes: Some states maintain legal nexus for the remainder of the tax measurement period; some maintain for a defined period after the nexus-creating activity; and others are evaluated case by case. California's ambiguous trailing nexus law, for example, affects many online retailers given the size of the state. It reads, tortuously:

  • The lingering effects of the retailer's physical presence in this state may continue to generate sales for the retailer for a reasonable period thereafter. So long as the retailer continues to generate sales from the lingering effects of its physical presence in California, the retailer is considered to be engaged in business in this state. . . .

    The trailing nexus period generally consists of the quarter in which the retailer ceases the activities that had caused it to be a "retailer engaged in business" in California, as well as the entire quarter that follows. Depending on the facts and circumstances specific to each retailer, the period of trailing nexus may be shorter or longer than the general "quarter-plus-a- quarter" approach.11

At least 35 states have adopted some form of trailing nexus, but given Quill, its constitutionality is suspect; it persists only because there has not been a successful challenge.12 These unpredictable and increasingly aggressive expansions of physical presence and trailing nexus calculations are some of the innumerable considerations that states impose on online retailers. As one tax professional put it, "it is virtually impossible to keep up with all state developments on a regular basis," a clear indictment of Quill 's rule simplicity.13

B. Quill's Simplicity (or Lack Thereof) -- Compliance


If an online retailer does not have a substantial nexus with the state, the consumer is liable for reporting the appropriate tax for relevant online purchases in the 45 states imposing use taxes.14 According to one survey, most consumers are completely unaware of the use tax, and only 1.6 percent of taxpayers actually comply.15 Twenty-seven of the 38 states with use and income taxes include use tax provisions on their tax forms.16 To the extent that rampant ignorance frustrates tax compliance entirely, the Quill approach fails that aspect of tax simplicity. Further, consumer compliance requires remarkable diligence: According to one member of the outlying 1.6 percent of compliant use tax payers, "It's a lot of fun. I go through my credit card receipts . . . page by page."17

For online retailers, compliance would be complicated even if the rule were clear. Calculating the tax rate in each jurisdiction can require tremendous time and resource costs. As of 2014, there were close to 10,000 tax jurisdictions across the 50 states.18 That proliferation is due to many states carving up their home turfs into more local tax jurisdictions and states with home rule allowing localities to adopt their own tax rates and exemptions, as well as to define nexus-creating activities.19 While Amazon and Overstock can presumably afford dedicated compliance departments, the mere possibility of compliance does not render the policy itself simple, and smaller businesses may not be in similar positions in terms of resource expenditure. The Small Business Association (SBA) recommends "online shopping-cart software services" that could perform the necessary computations for smaller retailers.20 Overstock's CEO, however, suggests the SBA's recommendation is optimistic:

  • It took our team of 20 to 30 experienced IT professionals 9,412 hours over five months to install, test, and integrate the software that let us properly calculate use tax in one additional state. The annual software license fees for the first year, the internal and external development and installation costs, and the cost of collateral hardware and software came to $1.3 million. And that's just for one state.21

Even retailers lacking nexus may face compliance obligations. Colorado, for example, requires non-collecting retailers to notify consumers of their potential use tax liability; send purchasers who buy more than $500 from the retailer annual purchase summaries, including "dates, categories, and amounts of purchases"; and send annual customer information reports to the Colorado Department of Revenue, listing "customers' names, addresses, and total amounts spent."22 The trade-off in imposing these reporting requirements is to ease the compliance complexity for consumers. The Colorado warning law faced a constitutional challenge in recent years, but the Tenth Circuit held in early 2016 that Quill only applies to retailers' tax remittance obligations -- and therefore poses no barrier to imposing reporting requirements.23

C. Quill's Efficiency Effects


Bricks-and-mortar retailers have been vocal about their disadvantage under Quill, which allows exempt online retailers to effectively charge consumers a lower price for goods in state. When effective sales tax (after incorporating local rates as well) can approach 10 percent, that tax incidence can indeed be perceptible to consumers.24 As the vice president of Barnes & Noble said, "We are at a serious competitive disadvantage against out-of-state, online retailers who pay no taxes."25


A 2014 study examined how Amazon laws have affected consumer decision-making in five states. By comparing consumer transactions before and after the implementation of those statutes, the study confirmed that consumer demand is elastic regarding sales taxes: In those states, spending on Amazon.com dropped by 10.7 percent after the tax took effect; for larger purchases of $250 or more, the authors estimated a 25 percent decrease.26 Consumers shift from Amazon toward bricks-and-mortar retail, as well as other online retailers who do not charge sales tax; the study reported a 2 percent bump for bricks-and-mortar retailers -- but the much larger boost of a 19.8 percent increase in sales actually went to Amazon's competing online retailers.27

D. Quill's Tax Revenue Effect


Revenue concerns are often used to justify a more aggressive online sales tax. States vary in their reliance on sales and excise taxes; Florida (which has no income tax) derived more than 82 percent of its revenue that way, while Alaska, Delaware, Montana, New Hampshire, and Oregon impose no sales tax (though Alaska does have local sales taxes).28


A University of Tennessee study estimated an aggregate $11.4 billion revenue loss from states' inability to collect tax on sales from non-nexus online retail transactions in 2012.29

However, it is not just Quill 's constitutional bar preventing states from collecting tax on online transactions; weak use tax enforcement actually leaves many of those dollars on the table (or rather, in consumers' pockets). Only 27 states include the use tax as a line item on tax returns (though three states, Louisiana, Massachusetts, and Michigan, reported increases in use tax collections after adding line items).30 States also tend not to actively enforce use tax collection (against consumers, anyway); tax authorities appear to prefer carrots over sticks in that regard. Fourteen states have tax amnesties, which encourage consumers to report use taxes by granting benefits through some combination of waiving penalties or interest.31 Maine reported taking in more than $5 million through its amnesty.32

E. Quill's Tax Fairness Effects


Distinguishing sales tax collection based on Quill 's nexus test violates some notions of tax equity. Amazon, for example, charges consumers use tax in 28 states. Although a New York citizen and a Vermont citizen may have equal internet access (perhaps relying on the same internet service provider), both subscribe to Amazon Prime, and even make identical Amazon purchases, the New Yorker would be charged at least 4 percent more in state sales tax (plus whichever local rates apply, such as 4.875 percent for New York City).33 The Vermonter would avoid that extra charge and, unless she is one of the 7.9 percent who actually self-reports use tax,34 will never bear the use tax incidence at all. That discrepancy violates horizontal equity if the difference between the New York and Vermont taxpayers is based on the decisions their states made to either adopt an Amazon law or not.


States may have to balance competing interests when making those decisions; some may fear that expanding use tax nexus would spook companies from investing in local job creation (that is, by establishing affiliates, telemarketers, and other advertising partnerships) and would rather sacrifice some consumption tax collection for higher incomes (and, consequently, income tax revenue). By passing a uniform, nationwide use taxation law, Congress could diminish those trade-offs.

Another source of inequity stems from even the traditional application of the Quill nexus test. Consumers living in a state where Amazon has a warehouse are charged a use tax, while other consumers without an in-state warehouse may not be subject to such a charge. One could argue that there is no equity violation in such a comparison, according to a benefits principle analysis. Those consumers could be viewed as being in different situations: The consumer paying use tax reaps the benefits of having an in-state warehouse (for example, quicker fulfillment), so that scenario is really one of vertical equity, and charging the use tax is sensible.

However, that analysis does not hold up in situations in which the same warehouse serves more than one state. For example, Amazon has a fulfillment center near Chattanooga, Tennessee, very close to the northern border of Alabama.35 Amazon has no warehouses in Alabama, so that Chattanooga warehouse presumably serves at least some consumers in Alabama as well. Having warehouses there, Tennessee is one of the 28 states for which Amazon charges use tax -- but Alabama is not. However, both states' consumers benefit from the same Chattanooga fulfillment center. Therefore, even applying a benefits principle type of equity assessment, the states' differing implementations of the Quill rule can sometimes violate tax fairness.

Another equity violation under the status quo goes beyond geographic borders (a variable that, to some degree, a consumer can change). What consumers cannot as easily change is their socioeconomic status, their ages, or their technological savviness. A Pew study found that 15 percent of Americans do not go online at all,36 while another study estimated that up to 41 percent of Americans do not shop online.37 Within that 15 percent of offline citizens, nearly half are older Americans,38 while 19 percent cite expense as the reason for not going online or owning a computer.39 Therefore, those tax "savings" (from non-nexus retailers) are systematically unavailable to some who are older and some who are poorer, which violates the Rawlsian conception of fairness providing equal access to all.

This access issue is compounded by the regressiveness of consumption taxes. Sales taxes already represent a larger burden to lower-income taxpayers, who generally spend a greater proportion of their income and wealth on consumption. Age tracks socioeconomic status to some degree (for example, as income decreases on retirement).40 Therefore, the erratic Quill system of use tax collection exacerbates the weight of consumption taxes on the elderly and lower-income, by shutting out those who do not access online commerce.

F. Quill's Effects on Social Goals


The Supreme Court determined in 1992 that preserving the appropriate balance between domestic and interstate commerce required drawing a bright line around states' remote taxing authority. The Quill Court believed the physical presence substantial nexus threshold served to keep factional state interests from dominating the well-being of the national economy.41 That sort of "crisis" was the original impetus behind the passage of the commerce clause.42 That history suggests that any congressional action that expands online retail use tax collection will necessarily disrupt that interstate commerce equilibrium, while maintaining that balance (at least what balance is achieved by Quill ) could be a legitimate tax policy goal.


On the other hand, states' inconsistent applications of Quill produce unequal treatment among online retailers, too. Some online merchants avoid triggering nexus to avoid charging use taxes, which would lead to those merchants deliberately refusing to extend commercial activity into some states. Ohio, for example, a state that passed an Amazon law that captures sales referred by in- state telemarketers, is concerned that its law "may discourage out-of-state companies from using Ohio telemarketers."43 As a result of the state's Amazon law, which establishes tax nexus through the use of in-state affiliates, Overstock.com terminated its 3,400 New York affiliates.44 Amazon similarly terminated its relationship with affiliates in Colorado, after the state passed its law, telling those affiliates that "there is a right way for Colorado to pursue its revenue goals, but that new law is a wrong way. . . . You may express your views of Colorado's new law to members of the General Assembly and to . . . [Gov. Bill] Ritter, who signed the bill."

In Amazon's earlier days, the company actively sought "sparsely populated" states to host their warehouses because fewer consumers live in those states and, as a result, Amazon would be able to charge fewer counts of use taxes.45 CEO Jeff Bezos has also said that Amazon's headquarters is in Seattle rather than Silicon Valley because the company was initially driven by a desire to avoid nexus in California.46 In 2011, however, California enacted an Amazon law, which expanded the definition of tax nexus to include in-state affiliates. Amazon held out until 2013 before opening a warehouse in California but now has five fulfillment centers across the state.47

While Amazon used to favor sparsely populated states, it now increasingly prefers states with larger populations for hosting its warehouses. There is, in fact, a correlation between state wealth and having nexus with Amazon: The top 21 states with the highest gross state products are all represented in the 28 states where Amazon collects tax.48 That correlation may be explained by Amazon's shifting operations strategy. As Amazon expands its operations, delivery speed increasingly becomes a priority over tax avoidance. Those two combined factors give Amazon a push to focus its physical presences in larger, more robust states.

In 2015 Amazon closed its only fulfillment center in Kansas, despite the company's overall trend of expanding "sortation center" presences near urban centers.49 The warehouse in Coffeyville, Kansas, previously provided one of the largest sources of employment in the area.50 In fact, in larger states where Amazon is choosing to grow its physical presence, the company is not shy to capitalize on that rhetoric; on the grand opening of its San Bernardino, California, warehouse, an Amazon vice president said, "We are so proud to bring more full-time jobs to the people of this great state."51

Evidently, the structure of a use tax policy can influence how and where commercial activity takes place. Those effects on local commerce and employment can be a legitimate tax policy concern through the consideration of social goals. Amazon's shifting strategy affirms that physical presence is indeed an important consideration, as the Quill court recognized -- but it is not the only factor that both influences and is influenced by tax policy. To the extent Congress wants to encourage economic activity in the states that may need the greatest boost (that is, the less urbanized), it should consider how the Quill status quo could encourage the opposite by concentrating economic activity in areas only when nexus already exists.

The Quill use tax formulation potentially puts a thumb on the scale in another way, further affecting the social goals of tax policy. States choose their tax regimes between various bases, such as income and consumption, potentially electing consumption taxes over income taxes because of the income tax's built-in disincentive to save. However, because the existing Quill rule is difficult to enforce regarding consumer-reported use tax, that approach leads to some states collecting on only portions of in-state consumption. That estimated $11.4 billion in uncaptured use tax revenue is not insignificant; accordingly, states may hesitate to maintain or expand their reliance on consumption taxes. While some states have skirted that enforcement problem by passing Amazon statutes, that solution is precarious; as previously noted, the constitutionality of the Amazon tax has been challenged, though the Supreme Court so far declined to decide one way or the other.

III. Efforts to Change the Quill Status Quo

Because of the problems under the existing approach to remote taxation, advocates have pushed for reform. There have been both state-driven initiatives and congressional proposals to change the online retail tax environment. Some of the most recent efforts are examined below.

A. The Streamlined Sales and Use Tax Agreement


Responding to the Quill court's concern that the uncoordinated patchwork of state tax laws poses undue administrative burdens on interstate commerce, some states have undertaken efforts to harmonize their tax laws. The Streamlined Sales Tax Project aims to "simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance."52 The SSTP focused on a few main areas of simplification, including streamlining administration of consumption tax collection to a single state-level agency; establishing a uniform tax base, at least within the boundaries of the state, such that the same goods would be taxed or exempted; and simplifying tax rates so that one rate applies statewide.53


The result of the SSTP is the Streamlined Sales and Use Tax Agreement. To date, only 24 states have adopted the SSUTA.54 Unlike the strong correlation between gross state product and having nexus with Amazon, six of the 10 largest states by economic output have not agreed to the SSUTA.55 The Streamlined Sales Tax Governing Board also breaks down member states into full members, or states that are in compliance with the SSUTA; and associate members, which include states in "substantial compliance" with the SSUTA but not necessarily all of its provisions.56 Even full membership, however, does not necessarily indicate that those states have meaningfully uniform tax laws that would lower remote retailers' administrative tax collecting burdens, since the SSUTA did not entirely capture the SSTP goals. To attract broader participation among states, the SSTP compromised on some simplification provisions, including reducing the number of sales tax jurisdictions and encouraging uniform tax rates across item categories, such as clothing or food.57

B. The Marketplace Fairness Act


The Marketplace Fairness Act (MFA) is the most well-known federal attempt to reform Quill. The bill's most recent iteration was introduced in 2015 and awaits passage in the Senate.58 While previous versions stalled in Congress, the 2015 version was introduced soon after Justice Anthony M. Kennedy indicated that at least one member of the bench is willing to revisit the Quill rule. In his concurrence in Direct Marketing Association v. Brohl, which remanded the case to the Tenth Circuit and later produced the aforementioned 2016 ruling, the justice said that "dramatic technological and social changes that have taken place in our increasingly interconnected economy" are "now inflicting extreme harm and unfairness on the states."59


Seizing on Kennedy's sympathies and the states' streamlining efforts, the Marketplace Fairness Act of 2015 builds directly on top of the SSUTA by authorizing its member states to require remote retailers to collect and remit use taxes, regardless of tax nexus. States that are not voluntary member states of the agreement could receive that federal authorization via an alternate route -- essentially, by enacting legislation that adheres to some "minimum simplification requirements," such as a single sales and use tax return and identifying a single in-state entity for all remote retail tax administration.60 Remote retailers with gross remote receipts of $1 million or less under the small seller exemption would not be required to collect.61

  • 1. Tax Policy Benefits of the Act


The most obvious benefit of the MFA would be revenue: the $11.4 billion in taxes that states claim they otherwise are not collecting. Some see that revenue goal as so alluring that it blinds legislators to the act's weaknesses and other options to address state budget shortfalls.62 Others caution that the sales tax loss estimates are overblown, from observing states that adopted Amazon taxes collecting substantially less revenue than the sum predicted by the University of Tennessee study. New York, for example, was estimated to receive $2.5 billion in use tax as of 2012, but actually collected only $360 million from remote retailers as of February of that year.63 The bill may increase state tax revenue but may not be a silver bullet.

To the extent that the MFA exempts fewer online retailers from a collection obligation than Quill permits, the bill would address some tax efficiency and fairness concerns. Broader use tax collection decreases the discrepancy between online and bricks-and-mortar retail, so it is reasonable to project that the documented consumption shifts following implementation of Amazon laws (in which purchases on Amazon dropped, while bricks-and-mortar and competing online retail increased) would be magnified across all online retailers now affected.

Two possible -- but likely inconsequential -- efficiency impacts remain under the bill. First, consumers could shift their purchasing to the smaller online retailers still exempt from use tax collection under the small seller exemption; however, it is unlikely that those small sellers -- with gross receipts capped at $1 million -- would be sufficient substitutes for all of the consumption capacities offered by Amazon or Overstock.64 Second, the act could now benefit consumers who are willing to drive to bricks-and-mortar stores in states with lower sales taxes. That option, however, will likely entice only the few who live near enough to state lines (though tax-saving shopping trips have been documented).65 Further, that remaining discrepancy stems from states choosing their sales tax rates, a separate issue from taxing remote online retailers.

Similarly, by decreasing the sales or use tax discrepancy between online and physical retail, the MFA could restore horizontal equity by equally taxing consumers in states where retailers have nexus and those in states where the same retailers lack nexus. The act would also reduce the disparity between digital natives and those consumers who do not engage in online retail (who also tend to be older and lower-income).

  • 2. Marketplace Fairness Act Shortcomings


The Marketplace Fairness Act also has its flaws.

The first involves its failure to resolve Quill's troubling compliance complexity. Because the legislation would effectively codify the SSUTA, the bill would likewise codify all of the compliance complexities imposed on interstate retailers by the SSUTA burdens. The agreement has not achieved simplicity and uniformity, instead sacrificing the former for more of the latter. For example, while the SSUTA contains a uniform definition for candy,66 it allows member states to maintain varying local tax rates67 -- an issue the MFA also would not address. In that regard, the passage of the legislation threatens to exacerbate Quill 's compliance complexity issues by obliterating the threshold nexus protection (even in its current, attenuated state), thereby expanding the number of remote online retailers subject to much of Quill 's compliance complexity morass.

The act's second major flaw involves its potential impacts on other worthy social goals, such as protecting small businesses. While the act attempts to level the playing field as between online and tangible retailers, it also would create a rift between large online retailers and their smaller online competitors. The small seller exemption's $1 million gross receipts cutoff may not adequately cover the full range of smaller online businesses that need exemption from the administrative burdens imposed by the act. As one CEO who successfully grew several small businesses put it, "For most people, [$1 million] sounds like a pretty large business. But retailers work on very small net margins, often 5 percent or lower. So the typical $1 million seller may have one part-time employee and may be earning about $50,000 a year!"68 The software, integration, product classification, and other associated compliance costs represent large, upfront expenses for those low-margin, small retailers. The MFA could discourage small, remote retailers from growing their in-state business past the $1 million gross receipts threshold, because even one extra dollar in gross receipts could trigger a crippling amount in immediate compliance costs.

In fact, while Amazon at one point opposed the act, in 2013 the online retail giant penned a letter to Congress to express thanks for the bill.69 The timing of that change in sentiment makes sense, considering Amazon's strategic shift toward building facilities and distribution centers near urban centers. Because the online retail giant is already collecting use taxes in many major states, a federal law would require minimal compliance costs from Amazon, while its competitors have yet to make those expenditures.

C. The Remote Transactions Parity Act


Similar to the Marketplace Fairness Act, the Remote Transactions Parity Act of 201570 would extend tax collection authority to states that comply with its "minimum simplification requirements"71 -- and thus has the same compliance complexity issues of any federal legislation maintaining the status quo of state and local tax jurisdictions.


One notable difference in the Parity Act is its small phase-in for remote sellers. For the first year of the state's expanded use tax policy, remote sellers with $10 million or less in gross annual receipts would be exempt -- a threshold that would decrease to $5 million in the second year and to $1 million in the third year.72 That phase-in may grant the limited allowance of extended notice to smaller retailers, but it still would impose prohibitive compliance costs on any remote retailer who would not meet the $1 million threshold until after the third year the law was in effect. At that point, the same discrimination against smaller online retailers and disincentives to expand inherent in the MFA would also hold for the Remote Transactions Parity Act. The latter also would calculate the small-seller threshold differently by including both remote and non-remote annual gross receipts. The upshot of that total gross revenue calculation is to exclude even more small retailers from the small remote-seller exemption than the MFA would.

D. The Online Sales Simplification Act


A striking alternative to the Marketplace Fairness Act and the Remote Transactions Parity Act, the Online Sales Simplification Act (still in the draft stages) would authorize an origin-sourced system of use tax collection. Online retailers charge consumers in participating states a sales or use tax based on the tax rates of the shipment location. The destination state generally would not be permitted to levy additional consumption taxes on the transaction. Participating states would be required to join a tax distribution agreement that would require online retailers to remit use taxes to the transactions' origin states, which would then send the taxes to a federal clearinghouse for distribution to each destination state.


The Online Sales Simplification Act's origin-sourcing elegantly avoids the persistent compliance complexity problems afflicting destination-based use tax policies, as online retailers would only need to calculate a single use tax rate,73 just as their bricks-and-mortar counterparts do. The draft bill, however, has its own adverse tax implications. Under that act, online retailers based out of low-tax states would have an advantage over retailers based out of higher-tax states. For online retail giants like Amazon or Overstock, the tax levied on the consumer could simply depend on the warehouse from which state the order ships. The draft addresses the concern that it could encourage online retailers to relocate later to one of the five states with no sales tax by calling on retailers in those states either to charge a flat use tax on remote destinations-based transactions or to report transactions details so that destination states may themselves collect the use taxes.74

However, because the Online Sales Simplification Act rests on voluntary state participation in the tax distribution agreement, the bill would have limited recourse against any state without a sales tax that refuses to participate. Some origin-sourcing proponents maintain that that approach leverages "federalism's advantage," serving as an incentive for states to keep their sales taxes low.75 Utilitarians and welfarists, for whom regressivity is anathema, may not mind that competitive pressure to keep consumption taxes low, but states may have other policy rationales for relying more heavily on consumption taxes (including the income tax's penalty against saving).

The Simplification Act's constitutional issues may prove more problematic. It essentially permits a foreign state to determine a remote consumer's tax rate, which becomes unmoored from the due process requirements underlying state tax authority discussed in Quill. That scheme could be salvaged on the basis that while the foreign state sets the tax rate, the revenue still goes to the consumer's home state to fund public services. Another wrinkle of the proposed legislation complicates that rejoinder: If the consumer lives in a state that is not a member of the tax distribution agreement, the national clearinghouse remits the use tax to the origin state.76 In that case, a remote state is setting the tax rate on -- and benefiting from -- a consumer who may never set foot within its borders. Origin-based sourcing raises a constitutional question that may stretch current understandings of due process, purposeful availment, and minimum contacts.

E. Latest Developments


In February Congress made permanent the tax exemption of the Internet Freedom Tax Act, which bars taxing internet access (for example, bandwidth taxes). As it relates to online retailers, the act bars "multiple and discriminatory" state taxes on e-commerce.77 The act does not wholly exempt online retailers from charging use tax, but neither does it provide federal authorization for taxing online sales more broadly than Quill. While some hoped Congress would address online retail taxation in the Permanent Internet Freedom Tax Act, lawmakers declined to take that next step.78 While some see that congressional inaction as a setback, the Marketplace Fairness Act, the Remote Transactions Parity Act, and the Online Sales Simplification Act are all in their early stages and provide lifelines for remote retailer tax proponents yet.


As noted, however, there are serious flaws with all three proposals. Because of the even greater number of tax policy issues under Quill, lawmakers should still contemplate a federal override of the dormant commerce clause. Congress should also carefully consider alternative legislative possibilities that ameliorate the complexities of destination-based use tax plans built on patchwork, localized tax jurisdictions like the SSUTA.


1 Ali Horatçsu and Chad Syverson, "The Ongoing Evolution of US Retail: A Format Tug-of-War," 29 J. Econ. Persp. 89, 96 (2015). Available at http://faculty.chicagobooth.edu/chad.syverson/research/evolutionofretail.pdf.

2Quill Corp. v. North Dakota, 504 U.S. 298, 307 (1992).

3 The Court provides, as an example of an onerous encumbrance, North Dakota's use tax, which "illustrates well how a state tax might unduly burden interstate commerce. On its face, North Dakota law imposes a collection duty on every vendor who advertises in the State three times a year. Thus, absent the Bellas Hess rule, a publisher who included a subscription card in three issues of its magazine, a vendor whose radio advertisements were heard in North Dakota on three occasions, and a corporation whose telephone sales force made three calls into the state, all would be subject to the collection duty. What is more significant, similar obligations may be imposed by the Nation's 6,000-plus taxing jurisdictions." Quill Corp., 504 U.S. at 313.

4Id. at 305.

5 "The 'substantial nexus' requirement is not, like due process' 'minimum contacts' requirement, a proxy for notice, but rather a means for limiting state burdens on interstate commerce. Accordingly . . . a corporation may have the 'minimum contacts' with a taxing State as required by the Due Process Clause, and yet lack the 'substantial nexus' with that State as required by the Commerce Clause." Id. at 313.

6Id. at 318.

7Id. at 315.

8 Jerry Donnini, "State Nexus Policies: Can Out-of-State Servers Create Nexus?" Salestaxsupport.com (Jan. 28, 2015). Available at http://www.salestaxsupport.com/blogs/issues/sales-tax-nexus/state-nexus-can-server-create-nexus/.

9 N.Y. Tax Law section 1101 (McKinney) (2008).

10 Petition for Writ of Certiorari at 3, Overstock.com Inc. v. New York State Dep't of Taxation and Fin., 2013 WL 4495978 (U.S.).

11 Sales and Use Tax Annot. 220.0275, Cal. State Bd. of Equal., May 1, 2009. Available at http://www.boe.ca.gov/lawguides/business/current/btlg/vol2/suta/220-0275.html.

12 "Remote Employees and Nexus -- Compliance Q&A," AVALARA. Available at, https://www.avalara.com/blog/2015/11/16/remote-employees-and-nexus-compliance-qa/.

13 Donnini, supra note 8

14 "What States Impose Sales/Use Tax?" Sales Tax Institute. Available at http://www.salestaxinstitute.com/Sales_Tax_FAQs/What_states_impose_sales_use_tax (last visited Apr. 22, 2016).

15 Chana Joffe-Walt, "Most People Are Supposed to Pay This Tax. Almost Nobody Actually Pays It," NPR (Apr. 16, 2013). Available at http://www.npr.org/sections/money/2013/04/16/177384487/most-people-are-supposed-to-pay-this-tax.

16 Nina Manzi, "Use Tax Collection on Income Tax Returns in Other States, Policy Brief," Minnesota House of Representatives at 2 (2015). Available at http://www.house.leg.state.mn.us/hrd/pubs/usetax.pdf.

17 Joffe-Walt, supra note 15.

18 Joseph Henchman and Richard Borean, "State Sales Tax Jurisdictions Approach 10,000," Tax Foundation (Mar. 24, 2014). Available at http://taxfoundation.org/blog/state-sales-tax-jurisdictions-approach-10000.

19 Gaile Cole, "Sales Tax Q&A: Home Rule States," AVALARA. Available at https://www.avalara.com/blog/2015/11/02/sales-tax-q-a-home-rule-states/.

20 "Collecting Sales Tax Online," U.S. Small Business Administration. Available at https://www.sba.gov/starting-business/learn-about-business-laws/online-business-law/collecting-sales-tax-online.

21 Jeff Jacoby, "Everything to Fear in Internet Sales Tax," The Boston Globe, Apr. 24, 2013. Available at http://www.bostonglobe.com/opinion/2013/04/23/there-nothing-fair-about-marketplace-fairness-act/jstsNZVjqB7i2WPKVK2t8O/story.html.

22Direct Mktg. Ass'n v. Brohl, 814 F.3d 1129, 1133 (10th Cir. 2016).

23Direct Mktg., 814 F.3d at 1136.

24 Brian Baugh, Itzhak Ben-David, and Hoonsuk Park, "The 'Amazon Tax': Empirical Evidence from Amazon and Main Street Retailers," NBER Working Paper Series (Apr. 2014), at 2.

25 Marc Lifsher, "California Lawmaker Pushes to Tax Online Sales," Los Angeles Times, Jan. 20, 2011. Available at http://articles.latimes.com/2011/jan/20/business/la-fi-internet-tax-20110120.

26 Baugh Ben-David, and Park, supra note 24, at 3.

27 Daniel B. Kline, "The Amazon Tax Problem: What Collecting Sales Tax Costs the Online Retail Giant," The Motley Fool (Apr. 23, 2014). Available at http://www.fool.com/investing/general/2014/04/23/the-amazon-tax-problem-what-collecting-sales-tax-c.aspx.

28 Chris Kahn, "Chart: Tax Burden by State," BANKRATE (Jan. 13, 2015). Available at http://www.bankrate.com/finance/taxes/top-tax-revenue-by-state.aspx.

29 Donald Bruce, William F. Fox, and LeAnn Luna, "State and Local Government Sales Tax Revenue Losses from Electronic Commerce," State Tax Notes, May 18, 2009, p. 537 2009 STT 94-1: Special Reports; and "Collecting e-Commerce Taxes e-Commerce Fairness Legislation," National Conference of State Legislatures (Nov. 14, 2014). Available at http://www.ncsl.org/research/fiscal-policy/collecting-ecommerce-taxes-an-interactive-map.aspx.

30 Mike Maciag, "Use Tax Revenues: How Much Are States Not Collecting?" Governing the States and Localities (May 1, 2012). Available at http://www.governing.com/blogs/by-the-numbers/state-use-tax-collection-revenues.html.

31 "Sales Tax Amnesty: Sales Tax Amnesty Programs by State," Sales Tax Institute. Available at http://www.salestaxinstitute.com/resources/sales-tax-amnesty.

32 Maciag, supra note 30.

33 "New York State Sales and Use Tax Rates by Jurisdiction," New York State Department of Taxation and Finance (2015). Available at https://www.tax.ny.gov/pdf/publications/sales/pub718.pdf.

34 At 7.9 percent, Vermont was actually the second-highest use tax reporting state (trailing Maine at 9.6 percent). Maciag, supra note 30.

35Amazon Fulfillment, Google Maps. Available at https://www.google.com/maps/place/Amazon+Fulfillment/@34.2360261,-87.2333638,6.82z/data=!4m5!1m2!2m1!1samazon+warehouse+in+tennessee!3m1!1s0x0000000000000000:0x795e0d39eebdeeb9 (last visited Apr. 22, 2016).

36 Monica Anderson and Andrew Perrin, "15% of Americans Don't Use the Internet. Who are They?" PEW Research Center (July 28, 2015). Available at http://www.pewresearch.org/fact-tank/2015/07/28/15-of-americans-dont-use-the-internet-who-are-they/.

37 "Nearly 70% of Americans Shop Online," MINTEL. Available at 2015), http://www.mintel.com/press-centre/technology-press-centre/nearly-70-of-americans-shop-online-regularly-with-close-to-50-taking-advantage-of-free-shipping.

38 Kathryn Zickhur, "Who's Not Online and Why," Pew Research Center (Sept. 25, 2013), at 2, 3. Available at http://www.pewinternet.org/files/old-media//Files/Reports/2013/PIP_Offline%20adults_092513_PDF.pdf.

39Id. at 2.

40 "Fact Sheet: Age and Socioeconomic Status," American Psychological Assoc. Available at http://www.apa.org/pi/ses/resources/publications/factsheet-age.aspx (last visited Apr. 22, 2016).

41 Striking that balance between local and national commerce has been a long-standing policy concern. See, e.g., Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 224 (1824) (Johnson, J., concurring).

42 "Before the Constitution, the states, left to their own devices, just about wrecked the national economy. Port states put taxes on goods going to interior states. Interior states taxed the port states. Everyone tried to exempt their own residents and put all their taxes on interstate commerce. That crisis is a big reason why they all gathered in Philadelphia and gave [Congress] the power to limit the ability of states to tax entities with no physical presence in the state." Henchman, "The Proper Role of Congress in State Taxation," Tax Foundation (Feb. 26, 2014). Available at http://taxfoundation.org/article/proper-role-congress-state-taxation-ensuring-interstate-reach-state-taxes-does-not-harm-national.

43 Sherry Karabin, "Tax Implications of Gov. Kasich's New Budget Discussed," Akron Legal News, Aug. 18, 2015. Available at http://www.akronlegalnews.com/editorial/13365.

44 Cade Metz, "Overstock and Patrick Byrne Sue New York Over Amazon Tax," The Register, June 2, 2008. Available at http://www.theregister.co.uk/2008/06/02/overstock_sues_new_york/.

45 Jay Greene, "Amid Rapid Expansion, Amazon to Shutter Kansas Warehouse," The Seattle Times, Oct. 1, 2014. Available at http://www.seattletimes.com/business/amid-rapid-expansion-amazon-to-shutter-kansas-warehouse/.

46 Greene, "Warehouse Growth Reflects Amazon's Evolving Tax Strategy," The Seattle Times, Oct. 29, 2013. Available at http://old.seattletimes.com/html/businesstechnology/2022149114_amazoncalifdistributionxml.html.

47 "Amazon in North America," Amazon.com. Available at http://www.amazonfulfillmentcareers.com/amazon-fulfillment/locations/.

48 "About Sales Tax," Amazon, http://www.amazon.com/gp/help/customer/display.html?nodeId=468512; and "Regional Economic Accounts: GDP & Personal Income," U.S. Department of Commerce Bureau of Economic Analysis. Available at http://www.bea.gov/iTable/drilldown.cfm?reqid=70&stepnum=11&AreaTypeKeyGdp=5&GeoFipsGdp=XX&ClassKeyGdp=NAICS&ComponentKey=200&IndustryKey=1&YearGdp=2015Q2&YearGdpBegin=-1&YearGdpEnd=-1&UnitOfMeasureKeyGdp=Levels&RankKeyGdp=1&Drill=1&nRange=5.

49 Greene, supra note 46.


51 Greene, "Warehouse Growth," supra note 47.

52 "About Us: The Streamlined Sales Tax Governing Board," Streamlined Sales Tax Governing Board Inc.. Available at http://www.streamlinedsalestax.org/index.php?page=About-Us.

53 Steven Maguire, "State Taxation of Internet Transactions," Congressional Research Service, at 14 (2013). Available at http://www.fas.org/sgp/crs/misc/R41853.pdf.

54 "About Us," supra note 53.

55 "Regional Economic Accounts," supra note 50.

56 Of the SSUTA's 24 member states, only Tennessee is classified as an "associate member" as of 2015. "State Info: Streamline Sales Tax State Members," Streamlined Sales Tax Governing Board Inc. Available at http://www.streamlinedsalestax.org/index.php?page=state-info (last visited Apr. 22, 2016).

57 Henchman, "The Scope of State Taxing Authority," Tax Foundation (July 2, 2010). Available at http://taxfoundation.org/article/scope-state-taxing-authority.

58 S. 698, 114th Cong. (2015).

59Direct Mktg. Ass'n v. Brohl, 135 S. Ct. 1124, 1135 (2015).

60 S. 698, supra note 59.

61See section 2(c), id.

62 A Competitive Enterprise Institute fellow claims, "For the states and localities it's purely a tax grab. Instead of trimming fat from their bloated budgets, governors and mayors are opting to spend time in D.C. schmoozing Congress for the right to tax other state's businesses." Jessica Melugin, "Marketplace Fairness Act is More About Tax Revenue and Rent-Seeking than Fairness," Competitive Enterprise Institute (Mar. 11, 2015). Available at https://cei.org/blog/marketplace-fairness-act-more-about-tax-revenue-and-rent-seeking-fairness.

63 Henchman, "Internet Sales Tax Collections Falling Far Short of Experts' Estimates," Tax Foundation (Mar. 18, 2013). Available at http://taxfoundation.org/blog/internet-sales-tax-collections-falling-far-short-experts-estimates.

64 For comparison, Amazon's gross annual revenue topped $107 billion in 2015. "Annual Financials for Amazon.com Inc.," Marketwatch. Available at http://www.marketwatch.com/investing/stock/amzn/financials.

65See Sumit Agarwal, et al., "Cross-Border Shopping: Do Consumers Respond to Taxes or Prices?" Working Paper, National University of Singapore (2013).

66 "Good Definitions Workgroup -- Definition of Candy," Draft Document, State and Local Advisory Council (Aug. 25, 2010), Available at http://www.streamlinedsalestax.org/uploads/downloads/IP%20Issue%20Papers/2010/IP10001%20_Candy%20_%20White%20paper%20background%20_%208_25_10%20for%20SLAC.pdf; see also "Appendix N: Classification of Products as Candy or Food or Food Ingredients," State and Local Advisory Council (May 19, 2011). Available at http://www.streamlinedsalestax.org/uploads/downloads/Rules/Appendix%20N%20Candy%20Product%20list%20May%202011%20_%20References%20updated%205_21_13.pdf.

67 "Current State Tax Rates," Streamlined Sales Tax Governing Board Inc. Available at http://www.streamlinedsalestax.org/index.php?page=alias-10.

68 Kate Harrison, "The Marketplace Fairness Act: Should You Join the Fight to Defeat It?" Forbes (June 22, 2013). Available at http://www.forbes.com/sites/kateharrison/2013/06/22/the-marketplace-fairness-act-should-you-join-the-fight-to-defeat-it/#2021062c5f27.

69 Lance Whitney, "Politicians Push Bill to Help States Collect Online Sales Tax," CNET (Feb. 15, 2013). Available at http://www.cnet.com/news/politicians-push-bill-to-help-states-collect-online-sales-tax/.

70 H.R. 2775, 114th Cong. (2015).

71 The Remote Transactions Parity Act includes an additional requirement, which extends greater audit protection to retailers who have not engaged in intentional misrepresentation. See section 2(b)(2)(A)(iii), Id.

72See section 2(c), Id.

73 Or, in Amazon's case, as many rates as the number of states in which they have warehouses, which is still substantially fewer than 9,600 tax jurisdictions.

74 "A New Internet Sales Tax Alternative -- the Online Sales Simplification Act," Accuratetax.com. Available at https://www.accuratetax.com/blog/a-new-internet-sales-tax-alternative-the-online-sales-simplification-act/ (last visited Apr. 22, 2016).

75 Drew Clark, "How Federalism Can Help Solve the Debate Over Internet Taxes," Deseret News, June 28, 2015. Available at http://www.deseretnews.com/article/865631563/How-federalism-can-help-solve-the-debate-over-Internet-taxes.html?pg=all.

76 David Brunori, "The Wrong Way to Tax Online and Other Remote Sales," Forbes, Feb. 19, 2015. Available at http://www.forbes.com/sites/taxanalysts/2015/02/19/taxing-remote-sales/#6c597b532614.

77 H.R. 3086, 113th Cong. (2013).

78 Naomi Jagoda, "Setback for Online Sales Tax Effort," The Hill, Jan. 11, 2016. Available at http://thehill.com/policy/finance/265286-setback-for-online-sales-tax-effort.