The Use Tax in the Internet Age: Or, What Use is the Use Tax Anyway

Abstract

In recent weeks, news reports on the Federal Government’s efforts to revamp the Federal Tax Code have captured the media’s attention, and ours. They call for our attention not just be-cause of the importance the tax code has on our livelihoods. But these stories have had a flair for the dramatic before bills have even come out of committee. However, the debates surrounding the federal tax code may not be the most pressing tax issue facing our society in the United States. Many states have eroding infrastructure and the states’ efforts to collect enough sales and use tax has been eroding. To see why the states’ tax base is eroding, we start and end with a case from 1992, Quill v. North Dakota. Quill Corporation was a Delaware corporation with offices and warehouses in California, Georgia and Illinois. Quill was the sixth largest retailer of office furniture in the country and had over $200,000,000 in annual sales. Just $1,000,000 of those sales came from Quill’s 3,000 customers in North Dakota. Yet it was the taxes on those sales that North Dakota’s Tax Commissioner, Heitkamp, felt obliged to collect. The resulting dispute before the Supreme Court has shaped the retail industry across the country. Today, over 25 years later, Quill v. North Dakota is having an even bigger impact as online sales accelerate. The reason: It established a rule that states cannot require a retailer to charge sales or use tax if the retailer’s only contact with that state is by mail or common carrier. This ruling established the Quill Standard, and it is responsible for today’s dangerous loss in sales tax revenue. In this paper, we will explore the intricacies and the inconsistencies of the Quill Standard. First, we will define what sales and use taxes are. Second, we will review the current impact and the potential future consequences if more out-of-state businesses may sell and ship their goods while avoiding these taxes. Third, we will introduce the Quill Standard for charging use taxes through out-of-state corporations. Fourth, we will explore the history of the Quill Standard to help us understand it in context. And last, we will review challenges to and reforms of the Quill Standard taking place both at the federal and the state level.