National expert on state taxes: Washington’s tax on remote sales “is the one to watch”

Among the provisions of the biennial budget adopted last summer was a revenue package that included a tax on remote sales. (Full list of 2017 adopted tax legislation here.) The tax on remote sales – also called “marketplace fairness – had been the subject of some controversy. The News Tribune reported at the time,

“I think with any legislation we have there’s always a litigation risk,” said state Rep. Kris Lytton, a Democrat from Anacortes who chairs the House Finance Committee. “But I can tell you based on conversations with attorneys, with the Attorney Generals’s office, we’re on good legal ground.”

Washington wants to charge sales tax on purchases made by state residents through online retailers around the country. Washington residents owe the state a “use tax” on many such purchases, but few people pay it.

Stores with a physical presence in the state — such as Amazon — are already required to collect sales tax.

Standing in the way of collecting more online sales tax is a Supreme Court ruling from 1992 known as Quill v. North Dakota. In that case, the nation’s high court decided a state couldn’t force online businesses to be the tax man if the business didn’t have a physical presence inside that state’s borders…

Washington’s plan gives retailers a choice: Charge a 6.5 percent sales tax as brick-and-mortar businesses do; or send information about the use tax to consumers and give a report to the Department of Revenue on purchases so the the state can better collect that tax.

The Washington Research Council’s budget brief said the marketplace fairness provision,

  • Requires remote sellers (sellers without a physical presence in Washington), referrers (people who list or advertise items for sale for a seller and receive a commission) and marketplace facilitators (people who contract with a seller to facilitate the sale of items through a marketplace) to either collect and remit sales taxes or comply with notice and reporting requirements to the customer and the Department of Revenue. This is not settled law at the federal level—see our report, “Washington’s Steady Move to an Economic Nexus Standard for Taxes”

In May, before the revenue package was adopted, we wrote of the challenges states face in taxing remote sales. We cited, among others, a Stateline report.

Stateline identifies two obstacles states face in attempting to make the tax work: the courts and Congress.

The nation’s highest court set the stage for the decadeslong saga over states collecting sales taxes from remote sellers in 1992, when it ruled that Quill Corp., a Delaware floppy disk seller, did not have to pay state sales tax in North Dakota because it did not have a physical location, or “nexus,” in North Dakota.

State legislators and others who want to change the nexus laws argue that the ruling in Quill Corp. v. North Dakota has far outlasted the era of the floppy disk and is ripe for change. In 2015, Supreme Court Associate Justice Anthony Kennedy appeared to agree when he said the Quill decision should be revisited. “Quill now harms states to a degree far greater than could have been anticipated earlier,” he wrote in a concurring opinion to a ruling that allowed a sales tax case from Colorado to go forward.

The National Conference of State Legislatures reports Washington had plenty of company in attempting to tax online sales.

States have become frustrated waiting for federal action, said [Max] Behlke [NCSL’s director of budget and tax policy], noting that NCSL is getting increased inquiries from states about what kind of legislation they can enact.

In 2017 alone, 34 states introduced remote sales tax legislation and notable legislation was enacted in states including Alabama, Indiana, Minnesota, North Dakota, Rhode Island, Virginia, Wyoming and Washington.

And our state’s law is said to be the one to watch as litigation moves along.

Washington state’s law, said Behlke, “is the one to watch.” The law has a low threshold ($10,000) and directly affects third-party (marketplace) sellers who sell goods on Amazon’s platform, many of which have gone untaxed. “Last month, Amazon said it was going to collect taxes on its entire platform in Washington.”

All eyes in the online tax world are currently focused on the U.S. Supreme Court, which may take up Mayfair vs. South Dakota within the first couple of weeks of 2018. As Lisa Soronen, executive director of the State and Local Legal Center, explained during another Forum session, the Supreme Court ruled in Quill vs. North Dakota in 1992 that states can’t force out of state retailers to collect sales tax.

States have pursued the tax, hoping the court will overturn precedent. NCSL suggests there’s a chance.

In 2015, Justice Anthony Kennedy wrote a concurring opinion in Direct Marketing Association vs. Brohl, that said the court was wrong in Quill, times have changed and the legal system should bring us a case to overturn Quill. The money quote: “Quill now harms states to a degree far greater than could have been anticipated earlier.”

Furthermore, Soronen added, shortly before joining the Supreme Court, Judge Neal Gorsuch wrote a concurring opinion strongly suggesting he thinks Quill should be overturned.

Something to watch in the new year.