Connecticut Revenue Commissioner Suggests That States “Ramp Up” Economic Nexus for Sales Tax Purposes

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In a provocative op-ed published in the March/April issue of the Journal of Multistate Taxation and Incentives, the Connecticut Commissioner of Revenue Services (Kevin Sullivan) argues that given Congress’s apparent unwillingness to pass the Marketplace Fairness Act, the states should consider taking matters into their own hands and simply act as if Quill is no longer good law.

The Commissioner appears to have been emboldened by Justice Kennedy’s concurrence in the U.S. Supreme Court’s recent decision in Direct Marketing Association v. Brohl, No. 13-1032, __ S. Ct. __ (Mar. 3, 2015), in which the Court unanimously held that the federal Tax Injunction Act (the “TIA,” 28 U.S.C. § 1341) did not bar a retail trade group from bringing a challenge to Colorado’s notice and reporting requirements in federal court. In the underlying case, the plaintiffs argued that Colorado’s requirement that remote retailers satisfy certain notice and reporting requirements for sales to Colorado residents was in violation of the rule of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which the Court held that under the dormant Commerce Clause, a state may not impose a sales/use tax collection obligation on a remote retailer unless it has established “physical presence” in the state. The Tenth Circuit Court of Appeals held that the TIA barred such an action in the federal courts, since the notice and reporting requirements were part of Colorado’s chosen method of “enforcing” its sales and use tax scheme. The Supreme Court reversed, however, unanimously agreeing that not every law which may affect a state’s collection of tax revenue falls within the ambit of the TIA; rather, a law must be related to a state’s “assessment,” “levy,” or “collection” of a tax, within the technical meaning of those terms, to fall within the TIA’s scope (i.e., a tax must be “assessed” first before the state can seek to levy or collect on it; the mere fact that a state law might increase tax collections does not bring the law within the scope of the TIA).

Before the Court’s decision in Direct Marketing, some commentators had speculated that the Court might use the decision to comment on—or even reverse—its 1992 decision in Quill, which has increasingly come under fire as a relic of a business era from another lifetime. However, such an outcome was always unlikely, given the specific reasoning the Court cited in the Quill decision itself: namely, that because the case was decided under the Commerce Clause, Congress has the power to reverse the decision at any time. Thus, the force of applying stare decisis with respect to the Quill decision is particularly strong; as the U.S. Supreme Court has recognized (and as Sullivan states), leaving resolution of the issue to Congress is the “constitutionally preferred solution.” To that end, while some commentators have made much of Justice Kennedy’s concurrence, it is arguably much more telling that in a case which presented the Court with an opportunity to cast doubt on the continuing viability of Quill—or even to reverse it—Justice Kennedy was the only one to address the issue (in a concurrence that no other Justice joined). Thus, the better take-away from Justice Kennedy’s concurrence in Direct Marketing may be to highlight the fact that the other eight Justices once again expressed no interest in revisiting or reversing Quill.

That background brings us around to Commissioner Sullivan’s suggestions in his recent article, in which he proposes that states should consider (1) issuing use tax assessments to all citizens, using their incomes as a proxy for estimating each citizen’s use tax liability; or (2) beginning to “push the envelope” of economic nexus, which—Sullivan implies—means that the states should begin to act as if Quill no longer imposes a physical presence standard for sales/use tax purposes.

While I can appreciate the Commissioner’s point of view as a state tax official, both proposed solutions are of great concern.  The first suggestion seems untenable because its “guilty until proven innocent” presumption is the beginning of a dangerous, slippery slope (Sullivan acknowledges that the situation created by this suggestion “is not a pretty picture”). A sales/use tax is imposed on the purchase of tangible personal property and enumerated services; Sullivan’s suggestion would create a presumption of a certain level of tax liability and require individuals to prove that they didn’t purchase a commensurate level of taxable goods and services.

The second suggestion—that states should simply begin to act as if Quill is no longer good law—has the potential to upset the traditional federal/state balance of power. If states begin taking actions that are in direct conflict with existing constitutional precedent because they believe a federal law or Supreme Court decision’s “time has passed,” where does it stop? The Supreme Court may be surprised that more than 20 years have passed and Congress still has not addressed the subject of Quill; it may even wish it could have a mulligan on Quill because of Congress’s delay. But that shouldn’t be taken as a sign that the Court believes it is time for the states to take matters into their own hands by acting as if the Court’s existing precedent is no longer good law. By addressing the issue in this manner (instead of through the federal legislative process), Connecticut would force taxpayers that file in good faith based on established Supreme Court precedent to waste time and expense fighting an assessment based on the state’s desire to get Quill reversed.  If the tables were turned, could taxpayers in other contexts simply file contrary to existing binding precedent without the risk of penalty or interest?

I expect Quill’s future to be a major topic in state tax circles in the coming months and years, and it’s probably fair to say that everyone in the state tax community is sensitive to Commissioner Sullivan’s frustration with Congress’s inability to make real progress on a federal solution. But I don’t think that nullification by the states is the answer.