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“The Supreme Court’s Decision to Deny Cert in DMA Is No Big Deal—Really”

State and Local Taxes Weekly David Brunori

A lot of practitioners have been alerting clients about the Supreme Court's refusal to hear the appeals in the Direct Marketing Association cases out of Colorado. The Court refrained from accepting the two petitions from the Tenth Circuit's decision to uphold the Colorado law requiring out of state sellers to file sales information with the state and to notify in state purchasers of their use tax obligations. The Direct Marketers Association sought Supreme Court review arguing that the Tenth Circuit's decision violated the spirit of Quill. Colorado filed a conditional cross petition with the high court hoping to overturn Quill. The Supreme Court's refusal to hear the case has left both sides unsatisfied.

But when the history of the sales tax in America is written, this episode will be relegated to a tiny footnote. No one really expected the Direct Marketers Association to win. It was a long shot. The case did not involve tax collection requirements by out of state sellers. Reporting requirements and the noxious notification of use tax obligations are different. Yes, Colorado was trying to get around Quill. And yes, Colorado was treating out of state sellers differently than in state sellers (who did not have to report or notify anyone). One may correctly wonder if the obligation of reporting sales and notifying customers are less onerous than actually collecting the tax. But the courts have always distinguished reporting and tax collecting.

At the same time, no one really thought Colorado would, if it got before the court, be able to overturn Quill. This case was just never viewed as a good vehicle for reversing physical presence standard. Again, because the courts distinguish tax collection and reporting, the chances overturning decades of precedent were slim. Yes, Justice Kennedy gave opponents of Quill hope by questioning the continued validity of Quill. But those opponents will have to wait for another case.

So what does the Supreme Court's refusal mean? If you sell into Colorado you will have to comply with the law. Remote sellers will not like that, given the expense and risks involved. And, some commentators are fretting over the possibility that other states will require reporting and notification similar to Colorado. But that is unlikely. The states don't want sellers to report their total sales. And they don't care if customers are notified since the customers are not going to pay use tax anyway. The states want remote sellers to collect the sales tax.

The states have moved beyond reporting requirements and will attempt to take on Quill much more directly. A half dozen states have enacted laws or promulgated rules requiring sales tax collection if certain sales thresholds are met. If you sell more than say $500,000 of goods into a state, you must collect sales tax even without a physical presence. There are or will be legal challenges in all of those states. And those challenges will get to the Supreme Court. Since those laws and regulations are by definition unconstitutional under Quill. Someday soon we will see if the Commerce Clause requires a physical presence for sales tax collection. But not today.

Originally published in State and Local Taxes Weekly, December 15, 2016