Summer 2012, Volume 117, Issue 1
Quibbling with Quill: Are States Powerless in Enforcing Sales and Use Tax-Related Obligations on Out-of-State Retailers?
Geoffrey E. Weyl 117 Penn St. L. Rev.253 (2012)
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ABSTRACT
Under the financial strain caused by the recent economic recession, many states have struggled to raise enough revenue to cover costs.[1] Accordingly, many states have begun to pass so-called “Amazon” tax laws (“Amazon laws”).[2] The purpose of these laws is to impose sales and use tax collection or reporting obligations on out-of-state online companies, such as Amazon.com (Amazon), on purchases by in-state buyers. However, in Quill v. North Dakota,[3] the United States Supreme Court placed significant limitations on the ability of states to impose tax collection obligations on out-of-state vendors.[4] Under Quill, the seller must have a “nexus” with the taxing state that does not violate either the Due Process Clause of the Fourteenth Amendment[5] or the Commerce Clause[6] of the United States Constitution.[7]
The challenge of applying traditional concepts of sales tax collection obligations in the age of e-commerce is that most online companies do not have a significant physical presence in every state.[8] Companies like Amazon use somewhat extreme tactics to avoid the burden and expense of collecting sales taxes in numerous jurisdictions by engaging in “entity isolation.”[9] Entity isolation means that the parent corporation establishes a number of subsidiary companies to perform specific functions in a state.[10] Because these subsidiaries are legally distinct from the parent company, the parent company never establishes a physical presence in-state and is thus not obligated to collect sales tax.[11]
Although entity isolation may have been taken to its extreme limit by e-retailers, the difficulty of requiring out-of-state companies to collect sales taxes is not unique to online vendors. Historically, states have been unable to impose sales or use tax collection obligations on out-of-state companies such as catalog or mail-order companies.[12] The states’ increased interest in collecting sales taxes from e-retailers is largely due to the explosion in e-commerce, which has grown tremendously in recent years.[13] This explosion has caused states to lose potentially millions of dollars every year in sales tax revenue.[14] States are not alone in their desire to have e-retailers collect sales taxes, as local brick-and-mortar stores have complained that online companies have an unfair competitive advantage because e-retailers are able to offer goods at lower prices by not collecting sales taxes.[15] Therefore, as states have scrambled to raise additional revenue due to the “Great Recession” and to help local businesses become more competitive, many state legislatures have passed Amazon laws.[16]
In general, the Amazon laws are designed to require e-retailers to collect sales taxes.[17] States have typically followed two models.[18] The first is the New York model, which broadens the definition of what constitutes physical presence, or nexus, in the state to include the “affiliates” of e-retailers.[19] Most states passing Amazon laws follow this approach.[20] The second is the Colorado model, which requires out-of-state e-retailers to notify customers of the obligation to pay use taxes and, in some cases, provide information to the state’s department of revenue concerning remote sales made to customers living in the state.[21] Remote sellers have fiercely criticized both models and have challenged the laws’ constitutionality.[22] Ultimately, congressional action will be required to determine whether states can impose sales tax collection obligations on out-of-state retailers.[23]
[1]. See Jeanine Poggi, Amazon Sales Tax: The Battle, State by State, The Street (Oct. 24, 2011), http://bit.ly/i3fvwq.
[2]. See Saul Hansell, Amazon Sues Over State Law on Collection of Sales Tax, N.Y. Times (May 2, 2008), http://nyti.ms/JdsJrs. These laws are known as “Amazon” laws because they largely are targeted at Amazon.com, one of the largest e-retailers. Id.
[3]. Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
[4]. Id. at 298.
[5]. U.S. Const. amend. XIV.
[6]. U.S. Const. art. I, § 8, cl. 3.
[7]. Quill, 504 U.S. at 305.
[8]. Daniel Tyler Cowan, New York’s Unconstitutional Tax on the Internet: Amazon.com v. New York State Department of Taxation & Finance and the Dormant Commerce Clause, 88 N.C. L. Rev. 1423, 1428 (2010).
[9]. See generally Michael R. Gordon, Up the Amazon Without a Paddle: Examining Sales Taxes, Entity Isolation, and the “Affiliate Tax,” 11 N.C. J. L. & Tech. 299, 306-08 (2010) (using the model of Amazon.com to explain basic principles of entity isolation).
[10]. Id.
[11]. Id.
[12]. E.g., Nat’l Bellas Hess v. Dep’t of Revenue, 386 U.S. 753, 758 (1967); see infra Part III.A (discussing due process requirements).
[13]. U.S. Census Bureau News, Quarterly Retail E-Commerce Sales; 4th Quarter 2011, at 1, available at http://1.usa.gov/KnvYkd. Total e-commerce sales in 2011 was estimated to be $194.3 billion, increasing approximately 16.1% from 2010. Id. Overall, e-commerce sales accounted for 4.6% of total retail sales. Id.
[14]. Donald Bruce et al., State and Local Government Sales Tax Revenue Losses from Electronic Commerce, ii, (May 18, 2009), http://bit.ly/8P2VUa.
[15]. See Gordon, supra note 9, at 300.
[16]. See Poggi, supra note 1.
[17]. E.g., N.Y. Tax Law § 1101(b)(8)(vi) (McKinney 2011 through L.2011).
[18]. There is a third model for states to collect sales taxes from out-of-state retailers known as the “affiliate nexus” theory, which essentially ignores entity isolation and examines the subsidiary and parent companies to see if there is a common ownership and a unitary business enterprise. Andrew J. Haile, Affiliate Nexus in E-Commerce, 33 Cardozo L. Rev. 1803, 1805-06, 1813 (2012). The “affiliate nexus” theory is beyond the scope of this Comment. For more information on this theory, see David Gamage & Devin J. Heckman, A Better Way Forward for State Taxation of E-Commerce, 92 B.U. L. Rev. 483, 520-22 (2012); see also N. R. Kleinfield, Amazon to Build New Jersey Warehouses and Collect State Tax, N.Y. Times (May 31, 2012), http://nyti.ms/Me7etf.
[19]. N.Y. Tax Law § 1101(b)(8)(vi). Amazon’s Associate’s program, for example, allows participants, known as “Associates,” to maintain links to merchandise on Amazon.com, and Amazon compensates these Associates with a percentage of the proceeds of sales that result from users clicking these links and making purchases. Amazon.com, LLC v. N.Y. Dep’t of Taxation and Fin., 877 N.Y.S.2d 842, 845 (N.Y. Sup. Ct. 2009), aff’d as modified 913 N.Y.S.2d 129 (N.Y. App. Div. 2010); see also Amazon.com, Associates Program Operating Agreement (Jul. 1, 2012), http://bit.ly/LkEpdI [hereinafter Operating Agreement].
[20]. E.g., N.Y. Tax § 1101(b)(8)(vi); Cal. Rev. & Tax. Code § 6203(c)(5) (West 2011) (effective June 29, 2011, temporarily repealed on September 23, 2011 until September 15, 2012 or January 1, 2013, depending on enactment of federal law); Conn. Gen. Stat. Ann. § 12-407(a)(12)(L) (West 2011); 35 Ill. Comp. Stat. § 105/2(1.1) (2011); N.C. Gen. Stat. § 105-164.8(b)(3) (2011); R.I. Gen. Laws § 44-18-15(a)(2) (2011).
[21]. Colo. Rev. Stat. § 39-21-112(3.5) (2011); Okla. Stat. tit. 68, § 1406.1 (2011).
[22]. E.g., Amazon.com, 877 N.Y.S.2d at 846; Direct Mktg. Ass’n v. Huber, No. 10-cv-01546-REB-CBS, 2012 WL 1079175 (D. Colo. Mar. 30, 2012); Performance Mktg. Ass’n, Inc. v. Hamer, No. 2011-CH-26333, 2012 WL 1986181 (Ill. Cir. May 11, 2012).
[23]. See infra Part V.B.2 (discussing Congressional action).