In their quests for tax fairness, numerous states are targeting sales by out-of-state vendors not required to collect tax under current laws. Different states are taking different approaches. Some are expanding the definition of what it means to do business in the state, thereby triggering a tax collection obligation. Others are requiring retailers to help facilitate use tax compliance through new notification and reporting requirements.
Nebraska’s Remote Seller Sales Tax Collection Act (LB 44) would do both. The measure seeks to create economic nexus, which would impose a tax obligation on remote sellers when one of the following is true in the previous or current calendar year:
- The seller’s gross revenue from taxable sales in Nebraska exceeds $100,000
- The seller makes 200 or more separate sales transactions in Nebraska
The measure would also impose a use tax notification and reporting requirement on remote vendors who refuse to comply with the economic nexus law. Noncollecting vendors would have to inform customers that sales or use tax is due on certain purchases and that the state requires the purchaser to file a sales or use tax return. In addition, vendors would have to file with the Nebraska Department of Revenue an annual report identifying the name and address of customers, along with the general type and volume of their purchases. Failure to comply with the notification and reporting requirements would lead to penalties.
Nebraska isn’t the first state to come up with such a use tax reporting and notification requirement. Colorado created one in 2010, although it was placed under an injunction shortly after being adopted. In 2016, the Colorado law was allowed to stand by the Supreme Court and deemed legal by the Tenth Circuit U.S. Court of Appeals. It will now take effect July 1, 2017. Similar measures have been adopted or are under consideration in other states, including Louisiana and Vermont.
Breaking the physical presence mold
Nebraska’s two-pronged approach perhaps stems from the difficulty states have in enforcing compliance with economic nexus laws. Nexus — the connection between a business and a state that establishes a tax obligation — traditionally is established when a business has a physical presence in a state.
This physical presence precedent has been upheld by the Supreme Court of the United States, most recently in Quill Corp. v. North Dakota 504 U.S. 298 (1992). Yet it is increasingly coming under attack from states that have seen their sales tax revenue decline in conjunction with an increase of untaxed internet sales. Several states, including South Dakota, already have economic nexus laws they hope could lead the Supreme Court to reconsider Quill.
Constitutionality of economic nexus called into question
South Dakota’s economic nexus law (SB 106) was challenged as soon as it was enacted, as the state intended. The constitutionality of the Nebraska measure has already been questioned by a member of the Nebraska Legislature: Sen. John Kuehn asked Attorney General Douglas Peterson to rule on the constitutionality of the requirements imposed under LB 44, “in light of the United States Supreme Court decision” in Quill.
The attorney general’s opinion, released yesterday, determined that imposing a sales tax obligation on remote sellers with no physical presence in Nebraska is unconstitutional “under the commerce clause as interpreted by the U.S. Supreme Court in Quill.” While admitting that the physical presence requirement “may well be outdated and unrealistic given economic and technological changes which have occurred since Quill was decided,” it found Quill to be binding unless it is overruled by the Supreme Court or Congress exercises “its power to regulate interstate commerce.”
However, the AG ruled that the notice and reporting requirements wouldn’t be contrary to Quill or the commerce clause on their own (though as it currently stands, the whole measure is unconstitutional in his opinion). For example, the bill could be amended to remove the economic nexus requirement and include its thresholds under the notice and reporting requirement. Additional details are available in the Opinion of the Office of the Attorney General.
Two amendments have been proposed already. AM 1074 reads, “If any section in this act or any part of any section is declared invalid or unconstitutional, the declaration shall not affect the validity or constitutionality of the remaining portions.”
Support and opposition
There are strong opinions both for and against this issue. Proponents such as the Nebraska Retail Federation are “working to even the playing field on this gross injustice to brick & mortar retailers.” Yet Nebraska members of the Council for Citizens Against Government Waste oppose the measure because it would “impose significant burdens on remote sellers by creating expensive regulatory compliance costs” by “forcing them to collect and remit taxes to a state in which they do not have a physical presence.”
There are many people who would like to see Congress take charge of the issue. The Supreme Court suggested as much back in 1992, in Quill. Congress has had ample opportunity to do so: In 2013, the Senate passed the Marketplace Fairness Act of 2013 on to the House, where it languished; since then, it has refused to consider an updated version of MFA and several other bills dealing with taxing remote sales: the Online Sales Simplification Act, the Remote Transactions Parity Act, or the No Regulation Without Representation Act. As the AG opinion notes, “At this time, the likelihood of congressional action in the near future appears remote.”
That leaves Quill, and to date, the Supreme Court has not agreed to hear a case that could challenge it. If LB 44 is enacted this session and subsequently legally challenged, it would likely join the growing line of state laws that could be the vehicle for challenging Quill.
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