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Thursday, March 3, 2011

Is the Quill decision a loophole?

I just saw two references to the effect of the 1992 Quill decision being a loophole. For example, see the Stand With Main Street website ( And a Bloomberg video with California Assembly member Skinner of March 2. And perhaps there are other examples as well. (Click here for the Bloomberg article that talks about Amazon threatening to cancel its contracts with California affiliates.)

Is the Quill decision a loophole? Well, first, what is a loophole? I define it as a law written for one purpose, but not written well enough, so taxpayers are able to use it for other purposes. For example, if a state wanted a lower property tax rate for commercial farms, but did not define the term well enough such that a homeowner with ten fruit trees in his backyard also gets the exemption, that is a loophole that needs to be fixed. (I had an op ed in the San Diego Tribune on this topic in 2008 - here.)

Does an interpretation of the commerce clause of the US Constitution by the US Supreme Court constitute a loophole for online stores? That just doesn't sound right. While we didn't have e-commerce in 1992, we had catalog sales. I don't recall anyone calling the decision a loophole for catalog stores before.

Also, sales of the same item by an online store and a bricks-and-mortar store are both subject to sales/use tax. There is no exception for the particular sale. So, the loophole is not that online sales are tax free. But, it often appears that way because so few buyers know what a use tax is and therefore don't pay it. If there was more publicity given to educating people about the use tax, buyers would know that when they see the price of goods at the online store, they need to add in the sales/use tax --- and they also need to pay it, which in most states, including California, they can do on their state income tax form (rather than having to file a separate return). If this rule was better known and enforced, I think many consumers would stop buying from online stores unless they told them they would take care of the tax compliance for them.

Why almost 20 years after the Quill decision do so few people know about the use tax?

I think it would help if more people talked about the use tax - including hearing from state officials that they paid their use tax. We have a continuing budget problem in California - let's collect taxes already on the books (use tax has been around since 1935). While it won't solve the entire budget problem, collection of this longstanding tax needs to improve.

Well, I've been paying my use tax even before there was a line on the income tax form. Have you paid your use tax? For more, see my prior blog and link to testimony on this topic - here.

1 comment:

Sylvia Han said...

I wouldn't call Quill decision a loophole.I think it is overdated. Back to 1992,with unsophisticated technology, that decision is appropriate. because (1), catologe sales is relatively small. (2) collecting and remitting tax is burdensome and not cost effective. the bright line standard of physical presence(nexus)test saved many catologe company and online business from collecting sales tax onbehalf of local tax juridiction. and facilited interstate commercie and economic grouth. nowadays with high technology, collectiong sales tax and remitting it to goverment is managable. further, the definition of physical presence should be modified under today's technology. and more, the online business is so pupular the lost revenue can not be ignored.

Since the ground of Quill decision is not there anymore, Quill decision should have no reference values for todays litigation regarding sales tax collection issues.

It is true that if publice are well educated on use tax and goverment determined to collect it with enforceble rules, the sales use tax gap could be smaller. However, collecting sale use tax from vendor is much more efficient than collecting from customer. If goverment want to recover those long lost revenues, collecting it from vendor is the best way - ecomic collection and minimum administation cost principle.