David Brunori, Partner

Publications & Media

“The Real High Cost of Quill”

Thomson Reuters David Brunori

As readers know, I am a sales purist. I think that the tax should be imposed on all final personal consumption at a very low rate. It should never be imposed on business inputs. For that reason alone, I have always thought Quill was wrongly decided. Everyone is waiting to see if South Dakota will prevail in the Supreme Court in its effort to end the physical presence standard.

In the meantime, the latest version of the Marketplace Fairness Act languishes in Congress. We should not be surprised. There have been bills introduced in Congress since the early 1990s to legislatively overturn Quill. But as I have been writing since the early 1990s, there is not a lot of incentive for a member of Congress to vote for a law that will effectively raise his or her constituent's state tax burden.

As we wait for either the Supreme Court or Congress to do something, the costs of the physical presence test mount. The Marketplace Fairness Coalition (a decidedly anti-Quill group) recently released a report that shows the states will lose about $211 billion in lost sales tax revenue over the next five years. In 2018, the Coalition estimates the loss to be about $34 billion. And the losses are widespread. Three quarters of the sales tax states will lose over $1 billion during that time.

Two hundred eleven billion dollars is a lot of money. And, those who favor greater spending on education, public safety, health care, and transportation will be thinking of what can be done with nearly a quarter trillion dollars. Those in state government who worry about looming budget deficits will be thinking about the lost billions as well. There are plenty of such folks in red and blue states.

Many focus on the lost revenue and what it could buy. But I submit there is perhaps a greater cost. When state and local governments cannot use the sales tax to its fullest extent, they look for other sources of revenue. Those other sources of revenue almost always represent terrible tax policy. The limits on the sales tax push states to impose greater taxes on business entities. Since Quill, many states have adopted combined reporting, some have enacted tax haven legislation, and worse, some have imposed gross receipts taxes. In many respects, Quill has been bad for business.

Quill hasn't been so hot for individuals either. Citizens want certain levels of public service. The government has to provide and pay for those services. Since Quill, we have seen a significant increase in excise taxes (cigarettes and marijuana in particular). There is nothing good about using excise taxes for general fund revenue. We have seen sales tax rate increases. You may not be paying tax on your online purchases, but you are paying more taxes at the local mall.

The wise men and women who know tax policy have long said the ideal is a broad base and low rates. The physical presence requirement effectively narrowed the base—a lot. That has led to higher rates and greater reliance on other, less principled, taxes. And that may be the real cost of Quill.

Constitutional but unwise.

Portland, Oregon rivals only Seattle and San Francisco in its rigor to advance questionable tax policy. In this edition, the city imposed a $35 per-person tax to fund public school art and music programs. Opponents of the tax filed suit claiming that the levy amounted to a poll tax forbidden by the Oregon Constitution. On September 21, the Oregon Supreme Court ruled that the tax is constitutional.

The tax at issue exempts residents under the age of 18, individuals with an annual income of less than $1,000, and anyone residing in a household that is at or below the federal poverty level. The city said that since the tax is not imposed on every person it is not a poll tax. The challenger asserted that because the tax is levied on everyone in the same amount—without respect to income—it is indeed a poll tax. But I am not sure how a tax that exempts people based on age and income can be a poll tax.

So the city is right legally. But I am not a fan of small special taxes earmarked for “important” underfunded projects. Indeed, most public finance experts would argue that it is better to use broad-based taxes and fund all services through the general fund. Earmarking the $35 for school arts programs means you can't use it for anything else. It also means that no one will ever want to spend more than what is earmarked. The victory will only encourage the city to adopt more special taxes earmarked for particular services. The case is Wittemyer v City of Portland.

Houston Property Tax Increase Proposed.

Houston was slammed hard by Hurricane Harvey. The city and its people are hurting after widespread devastation. The local government wants to help—by raising taxes on the folks in Houston to fund clean-up efforts. Mayor Sylvester Turner first proposed a property tax increase from 58.64¢ per $100 of appraised value to 63.87¢. That would have been the largest tax increase in city's history. The public and political reaction to the mayor was not kind and Turner revised his proposal. His newest plan is to raise the property tax 2¢ per $100.

On Wisconsin.

The new Wisconsin budget contains a plethora of tax changes. Signed by Governor Scott Walker on September 21, the tax changes are too numerous to list. But here are some things that you should know. The new law specifically says the state is not conforming to the new IRS partnership audit rules. It repeals the alternative minimum tax. It changes how the manufacturing and the agricultural credits are calculated. It makes the research tax credit partially refundable. The budget law modified the service income sourcing rules, loss carryforward rules, captive insurance reporting rules, property tax on machinery, and a whole host of sale tax changes—the most interesting is the exemption for purchases of all equipment related to bee keeping. The budget also allows local governments to impose taxes on lodging marketplaces like Airbnb.


I have had the honor to know the last three executive directors of the Multistate Tax Commission—Greg Matson, Joe Huddleston, and Dan Bucks. If you want to win a copy of my State Tax Policy book email me the name of the first MTC executive director.


Originally published in Thomson Reuters and is reproduced here with permission, October 2, 2017