Kuehn, 041817 NEAGO, AGO 17-2

Docket Nº:AGO 17-2
Case Date:April 18, 2017
Senator John Kuehn, Nebraska Legislature
AGO 17-2
No. 17-002
Nebraska Attorney General Opinions
State of Nebraska office of the Attorney General
April 18, 2017
         SUBJECT: Constitutionality of LB 44 - The Remote Seller Sales Tax Collection Act.          REQUESTED BY: Senator John Kuehn Nebraska Legislature          WRITTEN BY: Douglas J. Peterson, Attorney General, L. Jay Bartel, Assistant Attorney General          INTRODUCTION          You have requested our opinion on the constitutionality of LB 44 in light of the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) [“Quill”]. In Quill, the Court held that a North Dakota use tax collection statute requiring out-of-state mail order sellers to collect and remit use tax on purchases made by resident consumers violated the "substantial nexus" requirement of the commerce clause of the U S Constitution (art. I, § 8, cl. 3). The Court defined "substantial nexus" as "physical presence" in the taxing state. Id. at 312. LB 44 proposes to require remote sellers who do not have physical presence in the state to collect and remit sales tax on purchases made by persons in the state if the remote seller's gross revenue in Nebraska exceeds $100 000 or the remote seller's sales in the state comprise two hundred or more separate transactions. LB 44, §§ 3, 4. If a remote seller refuses to collect Nebraska sales tax, the remote seller is subject to notice and reporting requirements, including: (1) Notifying Nebraska purchasers that sales or use tax is due and that the purchaser is required to file a sales or use tax return; (2) Sending a notification to all Nebraska purchasers by January 1 of each year showing the total amount of purchases made in the previous year; and (3) Filing an annual statement for each purchaser with the Department of Revenue by March 1 of each year showing the total amount paid for Nebraska purchases by such purchasers during the previous year. LB 44, § 5. The bill also provides penalties if the remote seller fails to provide the required notices and statements. Id.          For the reasons stated below, we conclude that the sales tax collection obligation imposed on remote sellers having no physical presence in Nebraska is unconstitutional under the commerce clause as interpreted by the U. S. Supreme Court in Quill. Moreover, as Quill's interpretation of the commerce clause is binding on any state or federal lower court, it can be changed only by the Court or action by Congress exercising its power to regulate interstate commerce. The notice and reporting requirements, if amended, would not be contrary to Quill, and would not violate the commerce clause, based on a recent decision of the Tenth Circuit U. S. Court of Appeals.1 Because the notice and reporting requirements are not severable from the unconstitutional collection obligation under the bill as currently drafted, we conclude that LB 44 is presently unconstitutional in its entirety. The bill may, however, be amended to remedy these constitutional deficiencies.          ANALYSIS          I. LB 44's Requirement That Remote Sellers With No Physical Presence In Nebraska Collect And Remit Sales Tax From Nebraska Purchasers Is Unconstitutional Under Quill.          Quill addressed the constitutionality of a North Dakota statute requiring mail-order sellers who had no physical presence in the state to collect and remit use tax on sales to North Dakota residents. North Dakota brought a declaratory judgment action against Quill seeking a determination that it was liable for failing to collect and remit use tax. Quill argued the collection obligation was unconstitutional under both the due process and commerce clauses of the U.S. Constitution. 504 U.S. at 301-306. In an earlier case, National Bellas Hess, Inc. v. Dep't of Revenue of III., 386 U.S. 753 (1967) ['Bellas Hess"], the Court held an Illinois statute similar to North Dakota's that required a mail order seller with no physical presence in Illinois to collect use tax on products sold to Illinois residents "violated the Due Process Clause of the Fourteenth Amendment and created an unconstitutional burden on interstate commerce." Id. at 301. The Supreme Court of North Dakota, however, "declined to follow Bellas Hess because 'the tremendous social, economic, commercial, and legal innovations' of the past quarter-century ha[d] rendered its holding 'obsole[te].'" Id. (quoting State by and through Heitkamp v. Quill Corp,, 470 N.W.2d 203, 208 (N.D. 1991)). Reversing North Dakota court's decision that the statute was constitutional, the Court undertook separate inquiries under the due process and commerce clauses. While the Court determined that Quill's contacts with the state were sufficient for due process purposes, it found Quill's lack of physical presence in the state rendered the collection obligation invalid under the commerce clause. 504 U.S. at 308, 317-18.          Addressing the due process issue, the Court stated "[t]he Due Process Clause 'requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.'" 504 U.S. at 306 (quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45 (1954)). It noted that its "due process jurisprudence ha[d] evolved substantially in the 25 years since Bellas Hess..." beyond the point of requiring "physical presence" to permit a state to exercise jurisdiction over a defendant. 504 U.S. at 307-308. Thus, despite Quill's lack of physical presence in North Dakota, the Court found that, as Quill "purposefully directed it activities at North Dakota residents, [the] magnitude of those contacts [was] more than sufficient for due process purposes." 504 U.S. at 308.          On the commerce clause issue, the Court recognized that "Article I, § 8, cl. 3, of the Constitution expressly authorizes Congress to 'regulate Commerce with foreign nations, and among the several states.'" 504 U.S. at 309. While the clause "says nothing about the protection of interstate commerce in the absence of any action by Congress...", it "is more than an affirmative grant of power; it has a negative sweep as well." Id. The Court stated its "interpretation of the 'negative' or 'dormant' Commerce Clause ha[d] evolved substantially over the years, particularly as the Clause concerns limitations on state taxation powers." Id. The Court drew a distinction between the due process and commerce clauses based on the different constitutional concerns underlying the two clauses. It reasoned that, while the due process clause is concerned with "the fundamental fairness of governmental activity", the commerce clause is focused on "structural concerns about the effects of state regulation on the national economy." Id. at 312. "Thus, the 'substantial nexus' requirement is not, like due process' 'minimum contacts' requirement, a proxy for notice, but rather a means for limiting state burdens on interstate commerce." Id. at 313.          The Court noted the four-part test articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1974) ['Complete Auto"], under which a tax will be found not to violate the commerce clause if the "'tax [1 ] is applied to an activity with a substantial nexus with...

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