In the state sales and use tax area, there’s probably no bigger issue than the question of how do states enforce the use tax on remote sellers, and we all know that the Quill case [Quill Corp. v. North Dakota, 504 U.S. 298 (1992)] set a physical presence standard for enforcement, and so if you don’t have physical presence in a state, the state can’t require you to collect the sales and use tax. It doesn’t matter how many purchasers you may have in that state, it doesn’t matter how much product you might sell into that state. If you don’t have physical presence, the state can’t require you to collect the tax. So imagine if you had the federal income tax but no withholding, and so you are going to try and tax people’s income, but you can’t require employers to withhold the tax from wages. How much compliance would you get in that situation? We actually know the answer to that. The IRS has determined that about 55% of income is reported if there is no withholding or information reporting associated with that income, and that’s the position that the states are in. They would love it if they got 55% compliance; they actually get about 5% compliance.
So it’s now been 25 years since the Quill case, and there have been a number of efforts on the part of the states to try to get Congress involved in this problem and to step in and say, all right we are going to authorize the states to require remote sellers to collect the tax, but we want to see some simplification first, and so the states have been trying to go forward and simplify their sales and use tax rules in anticipation that eventually Congress would say OK, that’s enough, and that along with technology and other things have changed enough that we think we can now let states expand their collection enforcement. And it just hasn’t happened. We got close in 2013 with the Marketplace Fairness Act. The Senate passed it, but the House never did anything with it. There have been some other proposals talked about but really no movement otherwise since 2013. And so the states have one other option and that is to go back to the Supreme Court and ask the Supreme Court to reconsider Quill. That’s a big thing to do. It’s harder than it looks, actually. You have to have first of all a state that wants to contravene existing precedent. How do you that? You pass a law that’s unconstitutional, basically, and you get someone to challenge it, and you go to court and you litigate it and you hope that eventually the Supreme Court takes that case, and then you hope that the Supreme Court does something other than what it’s done in the past, which is to say that the physical presence rule remains in place and makes sense.
So states have now started down that path. It’s going to take a few years before they can get back to the Supreme Court, and that's assuming that the Supreme Court wants to take the case. We have some indication from the Supreme Court that they might want to take the case. In 2010, Colorado passed an information reporting law that was imposed on remote sellers that didn’t collect the tax, so basically remote sellers challenged that law. It's already been to the Supreme Court once on a procedural issue, but at the Supreme Court, one justice, Justice [Anthony] Kennedy, said, look, we recognize that Colorado is doing this because of Quill, and we recognize the limitations that we’ve placed on states and the fact that they’re having a hard time enforcing tax especially in an economy where a lot of consumer goods are sold across the internet, and went as far as saying, gee, you know, we think as a court that maybe if there’s a challenge brought, we should maybe think about taking that case. Now, Justice Kennedy is just one justice, and we don’t really know how the other justices on the court feel, but it’s likely that he would not have issued a concurring opinion saying this if he didn’t feel like there was some similar feeling among the other justices. So, we feel fairly confident that if we can get a case back in front of the Supreme Court, they would take it, and they would reconsider this physical presence rule.
In the meantime, of course, Congress can still act. Congress could act at any point even if the Supreme Court were to overturn Quill, and that may be in the long term, what most states expect will happen—to have a general rule at the federal level saying if you’ve got more than a certain amount of sales into a state, then the state can impose a collection duty on you, and it’s not tied to physical presence anymore, it’s tied to how much activity you have in the state, and that’s what I think most people think long term is the likely outcome.