An Internet retailer has filed suit against the State of Alabama, claiming its new rule requiring that all retailers selling more than $250,000 in goods annually must collect sales tax – regardless of whether the retailer has a physical presence in the state – is unconstitutional. This is not the first lawsuit of its kind; a suit was filed earlier this spring challenging the State of South Dakota’s law, which is similar to the Alabama rule.
In March 2016, U.S. Supreme Court Justice Anthony Kennedy wrote a concurring opinion stating that the “legal system should find an appropriate case for this court to re-examine Quill.” In Quill Corp. v. North Dakota, decided in 1992, the Supreme Court held that states cannot require retailers with no in-state physical presence to collect sales tax. Kennedy criticized Quill in Direct Marketing Association v. Brohl for many of the same reasons the GFOA, along with member of the State and Local Legal Center, stated in its amicus brief.
While Internet sales have vastly increased in comparison to sales from brick-and-mortar stores since 1992, states are unable to collect most taxes due on sales from out-of-state retailers. But Congress has repeatedly refused to overturn the Quill decision. Alabama’s rule, which became effective on January 1, 2016, was intended to contradict Quill, and it was expected to generate a lawsuit.
The Alabama lawsuit was filed in the Alabama Tax Tribunal, while the South Dakota lawsuit was filed in state court. Until either of these cases reaches the U.S. Supreme Court, the states will face an uphill battle. A ruling in favor of the states would require the administrative agencies or lower courts to nullify Quill v. North Dakota, a step that lower courts are often reluctant to take. But because all administrative agencies and lower courts are required to follow rulings of the U.S. Supreme Court, the strategy of the GFOA, along with the State and Local Legal Center, is clear: Encourage these states to pursue the case so that it may reach the U.S. Supreme Court.