Indiana-courthouse

On Aug. 28, Indiana Governor Eric J. Holcomb tasked Attorney General Curtis Hill with filing a lawsuit “to level the sales-tax playing field between Hoosier and out-of-state businesses.” The state maintains two internet retailers aren’t complying with its new remote sales tax law. House Bill 1129 requires certain out-of-state businesses to collect and remit Indiana sales and use tax as of July 1, 2017.

HB 1129 was immediately challenged by the American Catalog Mailers Association (ACMA) and NetChoice, trade associations working to “prevent barriers to ecommerce” and catalog sales. They say the new law is at odds with the laws of the United States.

They’re not wrong. HB 1129 flies in the face of precedent — upheld by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) — which holds that a state can only tax a business with a physical presence there. Under the measure, a business that makes more than 200 separate sales transactions or at least $100,000 in gross revenue from Indiana sales in a year has a significant enough economic connection with the state to merit a tax collection obligation (nexus).

NetChoice and ACMA expected a swift response from Indiana: “We believe the state may act quickly to file suit under the statute.” They got it, as did Overstock.com, Inc., and Wayfair, two non-collecting remote retailers now drawn into the suit as third-party defendants.

“It’s time”

Gov. Eric J. Holcomb believes “it’s time for the Supreme Court to revisit and overturn [Quill],” especially given “the rapid evolution and capabilities of software and technology, the incredible growth of online sales in recent years, and other factors.”

Fortunately for Attorney General Hill, HB 1129 was created to streamline a legal challenge to Quill. It authorizes the Indiana Department of Revenue to bring a declaratory judgment action against a remote seller to establish that:

  • The remote seller has an obligation to collect
  • The remote seller’s obligation to collect sales tax is valid under state and federal law

It also prohibits the state from enforcing the law against any remote seller that doesn’t voluntarily consent to abide by it.

“The law is plainly unconstitutional”

The state’s Answer and Third-Party Complaint explains HB 1129 “was adopted by the legislature with the express understanding that its terms contradict the United States Supreme Court’s decision in Quill Corp. v. North Dakota … regarding the limitations on state taxing power under the Commerce Clause of the United States Constitution.” Furthermore, “the law is plainly unconstitutional.”

The suit draws parallels between Indiana HB 1129 and South Dakota SB 106, which is currently under review by the South Dakota Supreme Court and on a “fast track” to the steps of the U.S. Supreme Court. It also notes the Indiana Legislature’s finding with respect to HB 1129, including:

  • The law is necessary because of “the urgent need for the Supreme Court of the United States to reconsider [Quill]”
  • “Expeditious review [of HB 1129] is necessary and appropriate” because remote retailers’ refusal to collect and remit tax “causes imminent harm to Indiana”
  • Indiana’s gross retail tax and use tax should be applied “to the limit of federal and state constitutional doctrines”
  • “Indiana law permits the state to immediately argue in any litigation that such a constitutional doctrine should be changed to permit the obligation to collect state gross retail tax.”

The Department of Revenue cannot enforce the law “as of the filing of this complaint.” Therefore, it “prays that this Court” declare HB 1129 “valid and applicable to the third-party defendants.”

Indiana joins growing line of states seeking to overturn Quill

With this suit, Indiana has joined a growing line of states seeking to challenge Quill with economic nexus. South Dakota is furthest along with its case, which is currently being deliberated by the South Dakota Supreme Court. Also in line: Alabama, Tennessee, and Wyoming.

Most states have given up hope of a federal solution, although they’d still prefer it. Congress could grant states the authority to tax remote sellers, and two bills long awaiting consideration in the House would do just that: The Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017. Alternatively, Congress could codify Quill under the No Regulation Without Representation Act of 2017, or similar legislation.

States like Indiana and South Dakota won’t easily drop their quest for remote sales tax revenue. To learn more about state efforts to broaden nexus, see the Avalara Resource Center, Sales Tax Nexus.