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...
