The US Supreme Court (SCOTUS) has denied a review of its 1992 "Quill"
decision restricting sales taxes on online sales, by not taking up a case against
Colorado's internet sales notice and reporting law.
Quill, a Supreme Court ruling before the internet sales boom, established the
"physical presence" test, where retailers are only required to collect
sales tax in states where they also have bricks-and-mortar stores. It was also
decided that only Congress has the authority to regulate interstate commerce
under the Commerce Clause of the US Constitution.
Colorado enacted a law in 2010 that imposed three obligations on online retailers
that do not collect sales taxes – "non-collecting retailers."
Under the law, such retailers have to send a "transactional notice"
to Colorado purchasers informing them that they may be subject to Colorado's
Additionally, online retailers must send an "annual purchase summary"
to those who buy goods from the retailer totaling more than USD500, listing
dates, categories, and amounts of purchases, to remind them of their obligation
to pay sales taxes on those purchases, while they are also required to send
the state government an annual "customer information report" listing
their customers' names, addresses, and total amounts spent.
Subsequently, Direct Marketing Association (DMA) brought a case against Barbara
Brohl, in her capacity as Executive Director of the Colorado Department of Revenue,
challenging the Colorado law and convinced a district court that it violates
the Commerce Clause because it discriminates against, and unduly burdens, interstate
Last year, the Appeals Court decided, to the contrary, that the Colorado law
does not contravene Quill, as "the notice and reporting requirements of
the Colorado law do not constitute a form of tax collection," In August
this year, DMA petitioned SCOTUS to pick up the case.
Brohl cross-petitioned explicitly asking SCOTUS to reconsider Quill. Her petition
said that "courts and commentators agree that the rule lacks doctrinal
justification, given that States may impose other regulations on businesses
that lack a physical presence within the regulating State's borders. And, with
the explosion of e-commerce to a multi-trillion dollar industry, the physical
presence rule has caused a startling revenue shortfall in many States."
By refusing to consider both petitions, SCOTUS has not taken up an opportunity
to repeal Quill, even though, in the Appeals Court, Justice Anthony Kennedy
had noted that "there is a powerful case to be made that a retailer doing
extensive business within a state has a sufficiently 'substantial nexus' to
justify imposing some minor tax-collection duty, even if that business is done
through mail or the internet," and suggested that "it is unwise to
delay any longer a reconsideration of the [Supreme] Court's holding in Quill."
Nevertheless, SCOTUS may soon be provided with another opportunity to take
a re-look at Quill, as the Ohio Supreme Court's decision last month to uphold
the state's commercial activity tax (CAT) may be presented to it.
The CAT has been imposed since 2005 on every business with "taxable gross
receipts" in Ohio, determined as orders of goods initiated online by Ohio
consumers and transported into Ohio by an out-of-state seller. However, the
tax only applies if a business has USD500,000 or more in annual gross sales
in the state.
The Ohio Supreme Court determined that, while a physical presence in a state
may be required to impose an obligation to collect sales taxes on an out-of-state
seller, that requirement does not apply to "business-privilege taxes,"
such as the CAT. It also found that Ohio's USD500,000 annual sales threshold
for the CAT means that a seller has a "substantial nexus" to that
The Colorado and Ohio cases are the latest elements in the ongoing battle by
states to impose sales tax on online sellers. While there have been delays in
proposals, such as the Marketplace Fairness Act, for bipartisan federal legislation
in the US Congress to resolve the issue, states and their courts appear to be
taking a larger role.