If the Court Overturns Quill, Will it Apply Retroactively?
As noted in Part Three of this article, one of the reasons the Quill Court upheld the “physical presence” standard set forth in National Bellas Hess, hoping that Congress would take action with prospective focused legislation. Should the Wayfair Court decide to overturn Quill, one of the issues it will have to consider will be whether the decision applies retroactively or prospectively. One theory is that the Wayfair Court may consider the discriminatory nature of any application that is not prospective only. In Complete Auto Transit, Inc. v. Brady, the U.S. Supreme Court established the following four-part test to determine the constitutionality of a tax on multistate transactions:
(1) the tax is applied to an activity having substantial nexus with the taxing state,
(2) the tax is fairly apportioned,
(3) the tax does not discriminate against interstate commerce, and
(4) the tax is fairly related to services provided by the taxing state.
[430 US 274 (1977)] The purpose of the four-part test established by the U.S. Supreme Court in Complete Auto Transit, Inc. v. Brady is to determine when non-resident businesses conducting interstate commerce in a state may be asked to contribute their “‘just share’” to collecting that State’s taxes. State use taxes complement the sales tax by imposing consumer self-reporting requirements on resident consumers when the remote seller in an interstate transaction does not collect the state’s sales tax. That is not to say that most consumers actually do self-assess and remit use taxes on our Internet purchases. It is just to say that the under the current state sales and use tax system, every state has a mechanism for administering use tax collection from the customer on interstate transactions in which the seller does not collect sales tax.
Were the Wayfair Court to apply the decision to overturn Quill retroactively, remote sellers, including Wayfair, could argue that this amounts to a discriminatory tax on interstate commerce, in direct violation of the Commerce Clause and the standard set forth in Complete Auto Transit, Inc. v. Brady. Remote sellers can assert that when they sold their goods, for example to a Virginia customer in 2017, they lacked physical presence and did not collect sales tax. However, the Virginia customer was liable for use tax and the Virginia Tax Commissioner had a use tax mechanism for enforcement of the use tax liability of the customer. Arguably, the customer may have even remitted the use tax to the state on its income tax return. Now, post-Wayfair decision, if applied retroactively, Virginia could assert that the remote seller is liable for sales tax that may – or may not – have been collected already from the customer as use tax. This amounts to double taxation, which is discriminatory against interstate commerce.
Whether the customer did or did not remit the use tax does not eradicate the discriminatory impact of retroactive application of a Quill reversal. There would be no plausible means for assessing, or for states to assert whether each and every customer did or did not remit use tax. Furthermore, the Court’s anti-discrimination test in Complete Auto Transit does not provide an exception when it is merely doubtful that the other party to the transaction actually paid the tax. As such, the Wayfair Court can rely on Complete Auto Transit for the position that it prohibits retroactive application, given that states have already imposed use tax on consumers with respect to remote transactions, and can’t force the remote seller to remit sales taxes on the same transaction.
In addition, the Wayfair Court will be guided by it’s 1971 decision in Chevron Oil Co. v. Huson, in which it considered retroactive vs. prospective application of a decision. [404 U.S. 97 (1971)] In Chevron Oil, the Court established a three-factor test for determining when a new rule should be applied on a prospective-only basis:
- “the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed”
- “we must weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation.”
- “we have weighed the inequity imposed by retroactive application, for where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the injustice or hardship by a holding of nonretroactivity.”
[404 U.S. at 106–07 (citations and internal quotation marks omitted)] While several Supreme Court decisions since Chevron Oil have applied retroactively to all affected parties (See, e.g., James B. Beam Distilling Co. v. Georgia, 501 U.S. 529 (1991); Harper v. Va. Dep’t of Taxation, 509 U.S. 86, 97 (1993)), it is still agreed among most justices and legal scholars that prospective only application of a decision is permissible and is guided by the Court’s test put forth in Chevron Oil.
If ever there were a case begging for prospective only application, it’s the Wayfair case should the Court decide to overturn Quill.
- First, this decision would overrule a “clear past precedent on which litigants may have relied.”
- Second, consider the historical mail order context in which Quill was decided, the explosive global growth of e-commerce, and the perverse and arbitrary application of Quill’s physical presence boundaries that govern state’s ability to impose sales tax collection obligations on a remote seller, when such boundaries do not govern other tax or legal obligations.
- Furthermore, as addressed above, given the concerns about double taxation surrounding retroactive application of sales tax on transactions already subjected to use tax, retroactive application will not further operation of the law, but only harm it.
- Third, as addressed above, there would be substantial inequitable and discriminatory results if remote sellers were required to remit sales taxes on transactions already subjected to use tax. For all these reasons, Chevron Oil establishes a pathway for the Wayfair Court to apply a prospective only decision to overrule Quill.
- Lastly, as noted above, if the Court were to overturn Quill within the confines of the South Dakota law, it would not have to wrestle with the retroactive vs. prospective issue. This is because the South Dakota law provides for prospective only taxation of remote sellers, which eliminates concerns relating to the retroactive application of the Court’s decision and historical liabilities for every taxpayer that has relied on the physical presence standard as a means for determining their sales tax compliance requirements. States that adopt the South Dakota law in an effort to tax remote sellers in compliance with the Court’s Wayfair decision could do so prospectively, resulting in an influx of newly registered taxpayers who are interested in compliance without the pressure of looking over their shoulder for historical exposure.
Whatever the outcome of the Wayfair case, we can rest assured that in state taxation, nothing is clear, and nothing is certain. Should the Court uphold Quill, or decide to overrule Quill, there will be questions. Regardless of the manner in which the Wayfair Court overrules Quill, there will be questions. Regardless of whether Congress enacts Federal legislation addressing state authority to impose sales tax compliance obligations on remote sellers, there will be questions.
As long as there are question and uncertainty, there will there remain countless arguments about nexus and state’s authority to impose sales tax compliance obligations on remote sellers. None of this may bring about much clarity for remote sellers, but we can all believe if Quill is overruled, the states will ultimately exercise more authority to tax remote sellers.
Fasten your seatbelts! It’s gonna be a bumpy ride!
Michael Dillon is an attorney, and the founder and President of Dillon Tax Consulting. With more than twenty years of state and local tax experience, Mike has both public accounting expertise leading the State and Local tax department for two of the country’s largest accounting and consulting firms, as well as serving as Tax Director for a publicly traded e-commerce retailer and as a tax attorney in one of the world’s largest communications companies. With his focus primarily on the state and local tax needs of businesses, Mike provides solutions and planning recommendations to clients’ questions regarding sales tax, business license tax, various other state and local tax matters, and other business compliance requirements.