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.