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MTC's legislative response to Quill.

In its last term, the U.S. Supreme Court handed down its long-awaited decision in Quill Corporation v. North Dakota, 5/26/92. In essence the Court ruled that while a state may not impose a use tax collection obligation on an out-of-state mail-order seller, Congress may legislatively grant states the power to impose such a collection obligation.

The states, however, may not have to wait for Federal legislation. The Multistate Tax Commission (MTC) has sketched out an innovative statutory system that provides an immediate solution to the states' setback in Quill.

On Oct. 21,1992, the MTC unveiled the second draft of its Uniform Interstate Sales and Use Tax Act (UISUTA).

The UISUTA is an attempt to insure that a seller pays tax to at least one state with jurisdiction to tax a sales transaction. The UISUTA is also designed to ensure that a taxpayer is not subjected to the risk of having to pay more than a single transaction tax, thereby eliminating the unfortunate scenarios illustrated by cases like Exxon Corp. v. Wyoming State Board of Equalization, 783 P2d 685 (Wyo. 1989), cert. denied.

The UISUTA is designed to encourage sellers voluntarily to collect tax for the state in which the object of the sale is actually used, despite the fact that the seller may not have constitutional nexus with that state.

The concept of the UISUTA is straightforward: it uses the assumed power of the origin state to impose a transactional tax on outbound (e.g., mail-order) sales. In order to create a mutual economic interest between the seller and the purchaser that the destination state's tax is timely paid, the UISUTA relies on the pokers of the origin state to tax.

The origin state imposes a provisional tax on out-bound sales. The origin state cedes its power to impose the provisional tax on outbound sales, however, if the destination state's tax is timely paid. This rule ensures that no provisional tax is owed as long as the destination state's tax is paid.

On the destination state's side of the transaction, a sales or use tax is always owed and payable either by the seller (if the seller has nexus with the destination state) or by the purchaser (if the seller has no nexus). No credit for the payment of other transactional taxes is available against the destination state's tax; the destination state's tax has priority over the origin state's tax. This is consistent with prevailing state tax policies that exempt out-bound sales from taxes. The UISUTA is drafted so that the only way that a purchaser can insure that it will bear the economic burden of only one transactional tax is to ensure that the destination state's tax is timely paid.

In order to determine the extent to which tax is due under the UISUTA, a taxpayer must determine the state of first use, the applicable rate of tax, the transaction's taxable measure and whether any allowable credits are available in all states that have jurisdiction to tax the transaction.

The application of the UISUTA to a particular transaction can in some circumstances be somewhat complex.

Some observers believe that the UISUTA's underlying premise, that the state of origin can impose a tax on sales bound for other states, is constitutionally flawed. These observers point to cases such as freeman v. Hewit, 329 US 249 (1946), for the proposition that the state of origin is barred from imposing its tax on sales destined for other states. The MTC's position is that these cases have only limited application after the Court's decision in Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977), and do not bar the state of origin from imposing a tax.

An additional constitutional challenge that has been suggested is that the UISUTA will result in impermissible multiple taxation. Taxpayers asserting such challenges presumably would have to establish that the UISUTA is either externally or internally inconsistent. In light of the UISUTA's careful drafting in anticipation of such attacks, it is uncertain whether such constitutional attacks would prevail.

Finally, it has been suggested that the UISUTA may be constitutionally challenged because it may result in the imposition of an interstate tax on a purchaser who has insufficient nexus with the taxing jurisdiction. The UISUTA, in practical effect, provides that an interstate transaction tax may be imposed by the origin state when the seller does not collect and remit tax to the destination state. Since the purchaser may be secondarily liable for this tax, a situation may exist in which a foreign state is attempting to impose its tax on a purchaser who lacks physical presence within the taxing jurisdiction. Subsequent drafts of the UISUTA may need to consider this issue in order to avoid this challenge.

Despite various potential constitutional challenges, the UISUTA is an innovative attempt to insure that a sales or use tax is paid in at least one state with jurisdiction over the transaction. The UISUTA's revolutionary approach, if valid, would effectively circumvent the Court's holding in Quill. The adoption of the UISUTA, however, would also revolutionize multistate sales and use tax compliance. This revolution is likely to require large-scale changes in multistate taxpayers' compliance procedures.
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Title Annotation:Multistate Tax Commission, Quill Corp. v. North Dakota
Author:Albert, Steve D.
Publication:The Tax Adviser
Date:Feb 1, 1993
Words:866
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