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In a comment to a prior post about a Maryland bill that would require mandatory ebook license be granted to Maryland public libraries, PG opined that the Maryland bill would also have constitutional problems because Maryland was trying to impose mandates on publishers (including indie authors) who had no meaningful contacts with the state other than offering licenses to their ebooks via Amazon or otherwise.
This comment was based upon two well-known US Supreme Court cases titled National Bellas Hess, Inc. v. Department of Revenue of Illinois (decided in 1967) and Quill Corp. v. North Dakota (decided in 1992).
Each of these cases was decided based upon what is usually described as the Commerce Clause of the United States Constitution which provides that the United States Congress shall have power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” (Article I, Section 8, Clause 3).
In simplified terms, since neither the Illinois Department of Revenue nor the state of North Dakota were the United States Congress, the two court decisions held that they couldn’t tax a company which was located outside of Illinois or North Dakota when the company’s only connection with the state was that it took orders from Illinois/North Dakota residents and mailed or shipped the merchandise to the in-state customer who had ordered it without having any offices, warehouses, etc., in Illinois or North Dakota.
In short, a state force a seller to collect sales taxes if someone inside the state sold something to someone else in the same state.
As PG mentioned in a comment to his prior post, older lawyers (a term which just barely describes PG) tend to think that the old law is the best law.
Alert visitor Mike Hall commented that he thought later case had changed the rule PG referenced.
Mike’s case is titled South Dakota v. Wayfair, Inc., and was decided in mid-2018, long after PG passed all of his law school tax courses and graduated. No client or any other intelligent being or species has asked PG about interstate taxation or the Commerce Clause since that time.
Frighteningly huge hordes of lawyers pass the bar, practice their art/craft/con for decades, retire, die and appear in a heavenly court to face their maker without being asked a single question about interstate taxation/Commerce Clause topics.
PG quickly pulled up a copy of South Dakota v. Wayfair, Inc. (40 pages of small type) and found a 5-4 majority decision plus a four-judge dissenting opinion plus two separate concurring opinions (for those who are counting, that’s four different opinions from nine judges).
The majority opinion criticized Quill (which was pretty easy to apply in practice – Do you have any offices in a state? Any employees? Any warehouses? Any manufacturing facilities?) with clear-cut, bright-line standards such as:
- Sellers who engage in a significant quantity of business within a state
- An activity with a substantial nexus with the taxing state
- Condemning the physical presence test as “an outdated proxy” for “substantial nexus”
- Declaring that there are “other methods” of establishing whether a seller has a substantial nexus to the state
Plus, criticizing the old bright-line Quill rule because it imposes “the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow.“
For “arbitrary, formalistic distinction,” PG might substitute “easy to understand and apply”.
The one bright spot PG perceives in the South Dakota v. Wayfair decision is that it generated a whole lot of business for tax lawyers.
George? Law Guy? Pay attention! I know your clock is running.
Am I doing a significant quantity of business in Tennessee or not? I sold 2,719 Magic Eight-Balls in Tennessee last year and but a thousand were returned because they didn’t work. Is that a substantial nexus or not?
Another guy tried to return 98 Magic Eight-Balls, but I refused to give him a refund because I thought they were working just fine and he said he was going to send them to Shanghai and have somebody make a bunch of knock-offs.
That doesn’t feel like a substantial nexus to me.
Long-time visitors to TPV may detect a bit of skepticism on PG’s part that the new sales-tax-collection standard is an improvement over the old one, but PG admits that might just be because he was a bit embarrassed to have missed the Wayfair case.
Here’s a Link to Wayfair: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf