Marilyn Wethekam “2018, the Year to Marginalize Quill”

State Tax Notes 01/05/2018

As published in State Tax Notes, Board Briefs, Dec. 18, 2018, pp. 1161-1162

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2017 was to be the year of federal tax reform. The initial federal tax reform proposals were more theoretical than detailed. There was, however, a common theme. The proposed reform was focused on territorial concepts, taxing imports, encouraging repatriation of foreign earnings by reducing the rate of tax on those earnings and stimulating the expansion of domestic manufacturing by expensing cost recovery. The initial proposal would cut the corporate tax rate to compensate for the expansion of the federal tax base. The potential impact of these corporate tax reform proposals reverberated throughout the state tax community. Both the corporate tax community and tax administrators alike voiced concerns. While these initial proposals stalled, federal tax reform is still on the horizon with some of those initial concepts being revisited in this new round of proposals. While the devil remains in the details, the initial concerns voiced by the SALT community still exist. The question is, will 2018 be the year of meaningful federal tax reform; will there continue to be a territorial focus of that reform; what impact the reform may have at the state level; and will the states decouple from the federal changes?

2017 was also the year to "kill" Quill. [79] As a result of the dicta found in the Direct Marketing v. Brohl [80] decision, the race to the U.S. Supreme Court was kicked off. Numerous states led by South Dakota enacted legislation [81] or drafted regulations that interpreted the substantial presence test set out in Complete Auto Transit v. Brady and applied by the Court in Quill v. North Dakota. [82] The movement to collect tax on the online sales has taken distinct approaches. States like South Dakota have enacted legislation that sets forth a minimum gross revenue and transaction threshold, which equates to substantial presence. The legislation was immediately challenged and the South Dakota Supreme Court has struck it down. [83] Thus, the substantial presence issue has been teed up for the U.S. Supreme Court. If the Court does not take the South Dakota case, there are others waiting in the wings. Massachusetts has taken the position that many internet retailers have created physical presence in the commonwealth through the use of software, advertising cookies, and other third-party contacts in the state. [84] This regulatory approach redefines the concept of presence. This new definition raises the question: In this electronic age, what is substantial presence? Minnesota took a different approach, enacting legislation which made the marketplace providers the in-state representatives of the online retailers. [85] While 2017 was the year to kill Quill, 2018 is shaping up to be the year to potentially marginalize its rationale.

In 2017 local jurisdictions took a page from the airline industry business model and began to charge fees or taxes on bags, sodas, and amusements to fill revenue needs. It is clear the revenue needs of cities, counties, and other local governmental bodies have increased over the last couple of years. The search for new revenue sources has caused jurisdictions to push legal boundaries, [86] expand existing tax schemes beyond the traditional approaches to areas such as the sharing economy, or develop new creative tax schemes aimed at increasing revenue. Some of the creativity is driven by the fact that state statutes may limit or restrict the type of taxes that may be imposed by local governmental bodies. Chicago, like San Francisco and other municipalities, enacted a tax on the retail sale or use of checkout bags in Chicago. Cook County, like numerous other local jurisdictions including Berkeley, Boulder, and Philadelphia, enacted a tax on sweetened beverages. Most local jurisdictions have some form of a tax on amusements. As technology changes and consumer preferences change, there has also been a movement at the local level to redefine the term "amusement" to include services such as Netflix, Direct TV, and other streaming services. This trend is likely to continue into 2018 with the enactment of new local taxes that further expand the taxation of the sharing economy or by creatively interpreting existing tax laws to equate these emerging business models with traditional business models.

79 504 U.S. 298 (1992).

80 135 S. Ct. 1124 (2015).

81 S.B. 106, 2016 Leis. Assemb., 91 Sess. section 1.

82 97 S. Ct. 1076 (1977); and 504 U.S. 298 (1992).

83 South Dakota v. Wayfair, No. 29160-GAS (Sept. 13, 2017). Petition for certiorari pending.

84 830 Mass. Code Regs. 64H.1.7.

85 Minn. Stat. section 297A.66 sub. 1(c)(1), (2). See also, the newly docketed Amazon Services LLC v. South Carolina Department of Revenue, No.17-ALJ-17-07-0238-CC.

86 The city of Chicago imposes a personal property lease tax on personal property used in Chicago including rental cars. The city attempted to require suburban rental car agencies located within 3 miles of the city limits to collect the tax when renting to someone with a Chicago address. The Illinois Supreme Court struck down Ruling 11, holding it violated the Illinois Constitution and was effectively extraterritorial taxation. Hertz Corp. v. City of Chicago, No. 119945 (2017).

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