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What the Quill decision means for business owners.

CPAs should make certain their clients or companies doing business out-of-state are fully aware of the ramifications of the U.S. Supreme Court's recent Quill decision. Direct marketers, such as L.L. Bean and Lands' End, breathed a sigh of relief when the Court handed down its decision in Quill Corporation v. North Dakota on May 26, 1992. The issue is whether out-of-state mail-order houses must collect use tax on sales to customers in states where the business has no physical presence. A ruling in North Dakota's favor would have caused fundamental changes in the way tax collection responsibilities are imposed and created increased compliance burdens for many businesses. However, the Court ruled in Quill's favor, and for now there will be no substantial change in the way companies administer use tax collection.

In Quill, the Court suggests Congress has the authority and may be better qualified to resolve this issue. While Congress may not authorize due process violations, Quill overrules the physical presence test for due process clause purposes. In part, the Quill decision says, "Congress is now free to decide whether, when and to what extent the states may burden interstate mail-order concerns with a duty to collect use taxes."

Use taxes

A use tax parallels a sales tax: It is imposed on goods purchased out-of-state and brought into the state for initial use, storage, consumption or delivery. Businesses with no physical presence in a state have not been required to collect the use tax.

Purchasers are required to remit uncollected use taxes to the appropriate taxing authority. Most do not, and states lose an estimated $3.2 billion each year in use tax revenue. In an attempt to increase use tax collection, at least 36 states now require out-of-state marketers to collect the use tax.

In 1987, North Dakota passed a law requiring out-of-state marketers to collect and remit use tax on property purchased for storage, use or consumption within the state. All vendors that advertised in North Dakota three or more times within a 12-month period were required to collect use tax on sales in the state. (Advertising includes subscription cards in magazines, radio ads heard in North Dakota and telephone sales calls made to North Dakota.)

Other state laws similar to North Dakota's could impose use tax collection responsibilities in over 6,000 taxing districts in the United States. Affected businesses would have to keep various tax rates, lists of exempt and nonexempt goods and exemption forms for each taxing district, in addition to completing monthly or quarterly use tax returns for each district.

Based on previous U.S. Supreme Court cases, Quill Corporation, an out-of-state mail-order house with neither outlets nor sales representatives in North Dakota, did not believe North Dakota had the right to impose a use tax collection responsibility. Quill did not comply with the North Dakota law and failed to collect and remit use tax on almost $1 million in annual sales in North Dakota.

The North Dakota tax commissioner filed an action against Quill requiring it to pay use tax, interest and penalties on all North Dakota sales made after July 1, 1987. The trial court ruled in Quill's favor but later was overturned by the North Dakota Supreme Court. The U.S. Supreme Court reversed the North Dakota Supreme Court and ruled Quill was not required to collect and remit use tax on goods sold for initial use in North Dakota.

POST-Quill considerations

In light of Quill, states will continue to lobby Congress to permit them to impose use tax collection responsibilities on out-of-state marketers. At the same time, direct marketers will actively support the status quo. Filing thousands of use tax returns each year may represent an undue burden on interstate commerce, even with today's computer technology. Setting uniform standards and reducing compliance burdens should be considered before use tax collection responsibilities are imposed on out-of-state vendors.

After Quill, businesses will make few changes in the way they process sales transactions. Ira physical presence, or nexus, exists, businesses are required to collect and remit use tax for states where property initially is stored, used or consumed; this is the same as before Quill. Lacking a physical presence. mail-order businesses will not be required to act as the state's agent in collecting use tax.

Many businesses should, but often do not, collect use tax. States will increase efforts to find these companies. Businesses falling into this category should quickly resolve the situation to minimize outof-pocket taxes, interest and penalties. Some states permit companies to register to collect use tax on transactions made after the registration. These states agree not to attempt to collect tax on transactions before voluntary registration.

Litigation in this area is likely to continue. States will claim individual situations differ from Quill or that nexus exists, particularly if there are additional sales solicitation activities. Businesses exempt from use tax collection responsibilities should review Quill to ensure their situations are substantially identical to the case's facts and circumstances. All businesses should consider the nexus consequences before undertaking new activities. It will be necessary to decide on a case-by-case basis if the benefits of an in-state presence outweigh the burdens of collecting taxes.

--M. A. Houston, CPA, is an accounting professor at Wright State University, Dayton, Ohio. S, K. Skinner, CPA, is sales tax administrator for The Mead Corporation, Dayton.


For now, the favorable Quill decision means CPA clients and companies need not change the way they collect use taxes. However, CPAs should watch developments in several related areas and keep clients and companies abreast of changes.

* State congressional lobbying efforts. Since the Quill decision specifically mentioned congressional action on use tax collection as a possibility, CPAs should expect stronger state lobbying efforts for legislation allowing states to require use tax collection by out-ofstate marketers. Direct marketers will argue against such action. CPAs should urge clients and companies to support the direct marketers.

* Expanded state collection efforts. CPAs should expect stepped-up state efforts to find companies that knowingly fail to collect use taxes. CPAs with companies or clients in that situation should advise them to minimize out-of-pocket taxes, interest and penalties by reaching an agreement with the state as soon as possible.

In some states, if a company registers voluntarily to collect use tax, the state will not attempt tO collect tax on transactions made before the registration date.

* Exempt companies and clients. CPAs should caution clients and companies to consider the nexus implications of additional sales solicitations before expanding activities into a state where the business is now exempt from use tax collection. CPAs should advise all clients or companies exempt from use tax collection to review the Quill decision to make sure their situations mirror those in Quill.
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Article Details
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Title Annotation:taxing out of state business; Quill Corporation v. North Dakota
Author:Houston, M.A.
Publication:Journal of Accountancy
Date:Aug 1, 1992
Previous Article:IRS gets new, more flexible guidelines on offers in compromise.
Next Article:Settlements at audit stage increase.

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