2016 state tax bellwethers - some cautionary notes: commerce is changing - and, not surprisingly, the state and local tax milieu is shifting as well - so taxpayers need to be on their toes.

• Author: Friedman, Jeffrey

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In 2016 several states have used a variety of tools in an attempt to manage challenges that plague all states. From contesting established United States Supreme Court precedents to making broad-sweeping statutory interpretations of state laws, the landscape of state and local tax is shifting to address the evolution of commerce. In this article, we evaluate significant state tax trends and explore the possible consequences and challenges associated with them.

Attempts to Overturn Quill

Last year, in his concurrence with the U.S. Supreme Court's majority opinion in Direct Marketing Association v. Brohl, (1) Justice Anthony Kennedy invited reconsideration of the Supreme Court's holding in Quill Corp. v. North Dakota. (2) Quill is the Supreme Court's landmark decision upholding the principle that only a company with physical presence in a state, such as having employees or a store, can be obligated by that state to collect and remit sales and use tax. Justice Kennedy criticized the physical presence requirement, originally established in National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois. (3) Justice Kennedy noted, "In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy." (4) Justice Kennedy stressed that due to Bellas Hess and Quill, states have had severe revenue shortfalls due to their inability to collect sales and use tax from Internet sales. (5) Given the rapid change in and growth of the Internet and technology, Justice Kennedy believed that "it is unwise to delay any longer a reconsideration of the Court's holding in Quill" and that the "legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess" (6)

States have exuberantly taken note of Justice Kennedy's call for reevaluation of Quill and have increased their attempts to challenge, overturn, or circumvent Quill. Some of these attempts directly challenge Quill by providing an economic nexus standard, whereas other states have argued that the Internet marketplace already meets the physical presence requirements of Quill.

Out-of-state retailers, especially large online retailers that have not met the traditional physical presence standard, will continue to be swept into the controversy until an "appropriate" case is brought before the U.S. Supreme Court or Congress intervenes.

Alabama

In September 2015, the Alabama Department of Revenue announced a regulation (7) requiring remote sellers with significant sales in Alabama to collect and remit sales and use tax. The regulation requires collection and remittance if an out-of-state seller that lacks a physical presence in Alabama had in-state sales exceeding $250,000 in the prior calendar year. (8) The regulation directly contradicts Quill, and based on commentary from the commissioner and the deputy co-commissioner of the Alabama Department of Revenue, the Department of Revenue acknowledges that its regulation is inconsistent with Quill and that it is willing to litigate the validity of its regulation in light of Quill which it argues should be overturned.

Soon after, in October 2015, the Alabama legislature swiftly passed the Simplified Sellers Use Tax Remittance Act, (9) which allows sellers without physical presence in the state to collect and remit sales and use tax at a flat 8 percent rate, rather than the combined state and local tax rate, which can be more than 8 percent.

Once the regulation became effective, the Department of Revenue asserted that various remote retailers had "substantial economic presence" and had failed to collect and remit Alabama sales and use tax. Newegg Inc. was one of those remote retailers. This past June, Newegg filed suit in the Alabama Tax Tribunal. (10) Newegg contends that its lack of an Alabama physical presence renders the Department of Revenues attempt to apply its regulation against it unconstitutional and a violation of U.S. Supreme Court precedent. Newegg also argues that the regulation conflicts with Alabama's sales and use tax statutes and that the Alabama Code does not authorize the Department of Revenue to impose collection and remittance requirements on an out-of-state retailer with no physical presence in Alabama.

South Dakota

South Dakota is also at the forefront of a legislative assault on Quill." Effective April 1, 2016, state Senate Bill 106 treats a remote seller "as if the seller had a physical presence in the state" in that a remote seller is required to collect and remit sales tax if the seller has made over $100,000 in sales or has made 200 or more separate transactions in the current or prior calendar year. The new law could be applied to extend sales and use tax collection over a non-physically present seller and thus contradicts Quill. Most of the bill is dedicated to a lengthy explanation as to why Quill should be overturned. Some of reasons include the states "inability to effectively collect the sales or use tax from remote sellers," "[t]he structural advantages of remote sellers," and the "urgent need for the Supreme Court of the United States to reconsider this [physical presence] doctrine." (12)

Since the new law became effective, both the South Dakota Department of Revenue and remote sellers have been attempting to test its validity. Once the law came into effect, the Department of Revenue immediately notified 206 remote sellers that they either had to register with the state and begin collecting and remitting sales tax or had to explain why they were exempt from these obligations. The Department of Revenue subsequently filed suit in state court against several large online retailers that failed to register to collect and remit sales tax: Wayfair LLC, Systemax Inc., Overstock.com Inc., and Newegg. (13) The state is well aware that its new law flies in the face of Quill: "The State acknowledges that a declaration in its favor will require abrogation of the United States Supreme Court's decision in Quill Corp. v. North Dakota." (14)

The retailers sought for the case to be transferred to federal court, asserting that the case should be removed because it raises an express question of federal law. (15) In response, the state has argued that the case should be remanded back to state court because the federal court lacks jurisdiction in declaratory judgment cases. (16) The state also argues that the case should be remanded based on comity grounds and that the Tax Injunction Act (17) prohibits federal jurisdiction. (18)

Remote sellers also responded immediately to the new law by filing suit against the Department of Revenue. On the same day the Department of Revenue's suit was filed, American Catalog Mailers Association (ACMA) and NetChoice, trade associations representing catalog...