NetChoice and ACMA File Legal Challenge against Massachusetts Tax Department Ruling on Internet Sales Tax Law
Department Revocation of Ruling
Statement of Steve DelBianco, Executive Director, NetChoice:
I am surprised to hear that the state plans another rule based on the same rationale as the one that failed this week. If the state tries again to blatantly violate Supreme Court precedent and the Internet Tax Freedom Act, we’ll re-file our lawsuit and look forward to another winning day in court.
The Court’s memorandum suggests that we would prevail in our claim that the rule violates the Internet Tax Freedom Act, which specifically prevents states from imposing taxes that discriminate against the internet.
Another claim is that Massachusetts is ignoring 150 years of federal doctrine saying that states may only impose sales tax mandates on businesses with a physical presence in their state. We don’t see how a court will agree that electrons flowing into a computer or smartphone comes anywhere close to a physical presence.
Background of Lawsuit
In June 2017, NetChoice filed suit against a Massachusetts regulation requiring out-of-state online retailers to collect sales taxes. The motion for a preliminary injunction can be found here, and the motion for declaratory judgement can be found here.
NetChoice Executive Director Steve DelBianco made the following statement on the lawsuit:
“The Massachusetts regulation blatantly violates Supreme Court precedent and the Internet Tax Freedom Act, a law Congress enacted specifically to stop states from imposing taxes that discriminate against the internet.
The Supreme Court has said for more than a century that states can only force businesses with a physical presence in their state to collect their sales taxes. Massachusetts is claiming that an out-of-state business is effectively setting up shop in the computers and smartphones of residents who enter the website address of that business. One wonders why the state didn’t say the same thing about businesses with telephone numbers that were dialed by Massachusetts consumers over the last 75 years.
State tax collectors must have been working in a dark basement in Boston, since they developed and adopted this regulation without public comment or even a single public hearing. But that’s a clear violation of state law regarding administrative procedures, as we argue in seeking an immediate injunction of the regulation.
Our lawsuit brings all this into the open, and we believe that a little sunshine will expose the legal flaws and unintended consequences on Massachusetts businesses.”
Key quotes from lawsuit:
“The new rule blatantly violates the provisions of ITFA, a statute crafted by Congress-and made permanent in 2016 — specifically to prevent the kinds of state tax obligations purportedly created by the Directive, namely, those targeting Internet vendors precisely because the vendors engage in electronic commerce.
The ITFA was expressly drafted with the intent of prohibiting states and localities from using Internet-based contacts as a factor in determining whether an out-of-state business has substantial nexus with the taxing jurisdiction.
The Commissioner and the Department lack the authority to disregard the Supreme Court’s controlling precedent in Quill based on the conclusion that subsequent developments may have undermined it.”
Excerpt from affidavit of ITFA author, former U.S. Rep. Chris Cox:
“I was the principal author of the lnternet Tax Freedom Act (“ITFA”), which was signed into law by President Bill Clinton on October 21,1998.
The principal purpose of the ITFA was to prevent commerce over the Internet — uniquely interstate because of its decentralized, packet-switched architecture — from being subjected to multiple and discriminatory taxation across a confusing patchwork of over 10,000 state and local taxing jurisdictions.
The explicit text of the ITFA outlaws Directive I 7- I ‘s reliance on the presence of a server for nexus.
As the author and principal sponsor of the ITFA, I can say without qualification that Directive 17-1 is precisely what the law was written to prevent.”
NetChoice and ACMA File Legal Challenge against South Dakota’s “Blatantly Unconstitutional” Internet Sales Tax Law
The state of South Dakota’s new Internet sales tax mandate – to force out-of-state sellers to collect South Dakota sales tax – is an unconstitutional expansion of state tax powers and directly conflicts with precedent set by the Supreme Court of the United States. That’s according to a suit filed today by the American Catalog Mailers Association (ACMA) and NetChoice in South Dakota’s Sixth Judicial Circuit Court. Andy Gerlach, Secretary of the South Dakota Department of Revenue, is the named defendant.
In 1992, the Supreme Court of the United States upheld in Quill Corp. v. North Dakota that, under the Commerce Clause of the Constitution, states do not have the power to require sales tax collection by out-of-state sellers having no physical presence in that state. Under Quill, a company whose only contact with the state is communicating with customers via remote means—such as mail, common carrier, or the Internet—lacks a “physical presence” in the state.
“South Dakota has imposed unconstitutional and unworkable burdens on remote sellers,”
In direct contravention of the Supreme Court’s Quill decision, South Dakota approved a statute (SB 106) that creates new sales and use tax collection obligations on remote sellers. This novel “economic presence” classification defines retailers as having nexus within the state if they exceed $100,000 in annual sales or 200 remote sales transactions with South Dakota customers. Moreover, this applies not only to physical sales, but also sales of digital goods and online services.
The new law takes effect May 1 and the State began circulating demand notices in March.
“South Dakota is showing wanton disregard for established Supreme Court precedent,” said Hamilton Davison, president and executive director of the ACMA. “This statute is blatantly unconstitutional and flies in the face of law that has been settled for decades. States simply don’t have the authority to pick and choose the Supreme Court decisions they will follow.”
“South Dakota has imposed unconstitutional and unworkable burdens on remote sellers,” said Steve DelBianco, executive director of NetChoice. “Left unchecked, this misguided tax law could set the course for enormous tax and administrative burdens on businesses across the country. Irresponsible state laws are not the way to make new national policies for interstate commerce.”
The plaintiff trade associations seek a declaratory judgment against the South Dakota Department of Revenue. If granted, this would mean that the statute is unconstitutional and therefore unenforceable.
“South Dakota is showing wanton disregard for established Supreme Court precedent,”
If not addressed, this new law will impose significant upfront costs on retailers. Research by the TruST coalition estimates that a mid-market retailer collecting taxes for states with multiple taxing jurisdictions and definitions would spend $80,000 – $290,000 in setup and integration costs and $57,500 to $260,000 in ongoing maintenance, updates, audits and service fees charged by “free” software providers.
ACMA and NetChoice represent eCommerce businesses, catalog and remote sellers who will be directly and adversely affected by South Dakota’s new sales tax law. They are also co-founders of the TruST coalition, which represents American businesses in the fight to keep interstate commerce and competition free from unfair tax burdens imposed by states where businesses have no operations or representation.
South Dakota is not the only state considering such unconstitutional sales tax laws. Other states have passed or are considering similar legislation to define economic presence and undermine Quill, including Alabama, Utah, and Colorado.
“This is equivalent to malpractice,” said Davison. “It represents exactly the type of bad governance that makes Americans cynical of big government. While US Supreme Court precedent gives Congress the right to make new rules for interstate commerce in this area, State legislatures do not have this right.”
Congress is currently working to create a federal solution to Internet and remote sales tax. The ACMA and NetChoice support a legislative approach laid out by the Chairman of the House Judiciary Committee, Bob Goodlatte, which would administer sales taxes based on the location of the seller, not the buyer. This is the system already in place for brick and mortar retailers, who collect only where they are physically located, and would put Internet sellers, catalog stores, and big-box retailers on a level playing field.
NetChoice and ACMA File Legal Challenge against Tennessee Internet Sales Tax Law
Injunction of Order
Tennesseans Not Buying New Online Sales Tax Regulations
Proposed New Rules Would Hurt Tennessee Businesses and Amounts to a State-Wide Tax Increase, NetChoice Survey Finds
Tennessee regulators are asking the legislature for new sales tax collection rules, but the clear majority of Tennesseans think that the current online sales tax collection process is working just fine, per a new NetChoice survey of Tennessee residents*. Further, many think the planned changes could have an adverse effect on Tennessee businesses.
More than 69 percent of Tennesseans think the current online sales tax process — where only companies that have physical presence in the Volunteer State must collect state taxes from residents – is working. However, Tennessee is slated join Alabama and South Dakota as the only states to require out-of-state sellers to collect sales tax – despite U.S. Supreme Court rulings that states may demand tax collection only from businesses that have a physical presence in the state.
“Tennessee tax collectors are poised to extend their taxing powers, leaving the state vulnerable to legal challenges, and exposing Tennessee-based businesses to retaliation from other states,” said Carl Szabo, policy counsel and a scheduled witness at Thursday’s Joint Government Operations Committee hearing.
“Ignoring federal doctrine by requiring out-of-state businesses to collect sales tax is a killer for small businesses and a losing cause in the courts.”
Only 21 percent of those surveyed were inclined to support Tennessee’s proposed new sales tax regulation. Moreover, 56 percent consider the new rule a statewide tax increase, and 46 percent think it will adversely affect Tennessee businesses.
Breaking with the remote sales tax rules established by the 1992 Supreme Court decision in Quill would require small businesses in Tennessee to track and collect sales tax for 12,000 jurisdictions across the country. Giving state tax authorities the power to regulate across state lines would cripple many small businesses –placing more power and market share in the hands of big-box retailers.
The NetChoice survey further revealed that 64 percent of Tennesseans fear the new rule would encourage other states to impose similar obligations. In addition, only 22 percent support laws and rules that allow tax authorities to audit out-of-state businesses.
Poll at NetChoice.org/TNtaxPoll