eFairness Litigation: Leveling the Playing Field

 See South Dakota Petition for Certiorari 

Consumers owe state (and sometimes local) taxes on all purchases of taxable goods or services regardless of whether the seller collects the tax. Under current law, local stores collect that tax from the consumer at the time of sale and send ("remit") the tax to the taxing jurisdiction. This rule extends to any sales transaction in the jurisdiction – even an online transaction – if the retailer from whom the purchase is made has a substantial nexus with the state, which generally means a physical presence in the state (e.g., a store, an employee, or an affiliate).  However, states and local municipalities do not currently have clear authority to require "remote sellers," such as catalog and online businesses that do not have a physical presence in the state, to collect and remit taxes from residents' purchases.  As a result, states are experiencing significant revenue shortfalls because they have no effective means of enforcing payment of the taxes that are due on online sales; this situation is particularly acute for states without an income tax.[1] For local retailers, the state of the law creates an economic disadvantage: consumers will increasingly purchase products from online retailers without a physical presence in the state because the cost to the consumer appears lower by as much as 10% or more in some jurisdictions.

This artificial distinction within the retail industry is directly attributable to two U.S. Supreme Court decisions: National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967) and Quill Corp v. North Dakota (1992). Bellas Hess was a mail-order retailer doing business in the state of Illinois without any physical presence in the state except for the catalogs that it mailed to state residents to encourage them to purchase products from the company.  The Illinois Department of Revenue charged the company with failure to collect Illinois sales and use taxes.  The US Supreme Court ruled that, because the Illinois law applied to companies that were not physically located in the state, it violated both the Due Process Clause of the US Constitution and the so-called "dormant Commerce Clause" of the Constitution, which US Supreme Court jurisprudence held limited the states' power to burden interstate commerce even in situations in which the US Congress had not asserted its Commerce Clause authority. 

"Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill. A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier. It should be left in place only if a powerful showing can be made that its rationale is still correct."

-Justice Kennedy

Two decades later, due in part to the Court's evolving jurisprudence[2] and in part to significant economic and technological changes, states formed the opinion that Bellas Hess was no longer good law.  North Dakota, in 1987, enacted a new law that required remote sellers such as catalog retailers to collect and remit taxes on sales to the state's residents.  Quill was a mail-order retailer and also the sixth largest office supply retailer in North Dakota. When North Dakota amended its tax statute to define remote retailers as liable for state sales and use taxes, it attempted to collect these taxes from Quill. Quill sued, arguing that this collection attempt violated Bellas Hess and interstate commerce regulations. The Supreme Court held in 1992 that the contacts between Quill and North Dakota were sufficient to satisfy the Due Process Clause but that the dormant Commerce Clause did not permit the state to impose a sales tax collection obligation on remote sellers that did not have a physical connection with the state.  However, since the Court agreed to remove the Due Process bar from Bellas Hess, the only bar remaining was the dormant Commerce Clause (about which several justices expressed then—and continue to express—hostility). Moreover, the Constitution gives Congress authority to regulate interstate commerce, and thus the Court repeatedly pointed out in oral argument that Congress could overrule the Court and expressly authorize the states to impose sales and use tax collection obligations on remote sellers without a physical presence if Congress chose to do so.  Justices Kennedy, Thomas, and Scalia concurred, but only on the grounds of stare decisis (deference to settled law), and Justice White concurred in part and dissented in part, arguing that the court was creating an artificial distinction between nexus requirements and due process requirements.

Because the Quill Court lay the problems the Court had created in Bellas Hess on the congressional doorstep, most efforts since 1992 have been focused on a legislative solution. However, in 2015 Justice Anthony Kennedy signaled interest in reviewing the Court's physical presence standard for sales tax collection in his concurring opinion in Direct Marketing Association v. Brohl [Brohl I]. At the heart of the case was a Colorado law that required remote sellers either to collect and remit sales taxes or to inform (1) consumers of their duty to remit sales tax and (2) the state taxing authorities about those in-state residents that had made significant purchases on the remote seller's site. The law had been challenged by the Direct Marketing Association but the issue presented to the US Supreme Court in Brohl I was an ancillary Tax Injunction Act (TIA) issue rather than the constitutionality of the Colorado law itself. Although he agreed with the majority opinion on the TIA issue, Justice Kennedy took the opportunity afforded by the case to write a separate concurring opinion that labeled the Quill rule "doubtful authority" that "harms States to a degree far greater than could have been anticipated earlier." Justice Kennedy concludes by encouraging the legal community to "find an appropriate case for this Court to reexamine Quill and Bellas Hess."[3]

"The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess."

 - Justice Kennedy

As a result of this renewed interest at the highest level of the judiciary, eFairness laws and regulations have multiplied, spurring multiple lawsuits involving remote sellers. The leading suit is in South Dakota, where two separate cases are ongoing. Click here for a detailed background on South Dakota eFairness litigation and to access the briefs filed in both cases.  

Litigation has also been initiated in Colorado, Alabama, Tennessee, Massachusetts, Indiana, and Wyoming. Click on each state for a background on its case and for links to the briefs filed.


[1]             These states do not have an income tax: Washington, Wyoming, South Dakota, Nevada, Texas, Alaska, Tennessee, Florida, and New Hampshire.

[2]             See, Complete Auto Transit v. Brady (1977).

[3]             His concurrence may have been prompted by an amicus brief filed by the State and Local Legal Center on behalf of several associations representing government officials.