Indiana to tax more out-of-state sellers under new economic nexus law

Update 9.30.2018: Indiana will enforce economic nexus starting October 1, 2018. Additional information is available from the Indiana Department of Revenue.

Learn more economic nexus and its potential impact on remote sellers in all states at this Avalara resource page.

Companies that lack a physical presence in Indiana but make more than $100,000 in gross revenue from Indiana sales transactions, or more than 200 separate sales transactions in the state, are required to collect and remit Indiana sales and use tax beginning July 1, 2017.

Currently, Indiana cannot impose a tax collection obligation on a business unless it has a substantial connection with the state, or nexus, which is generally defined as a physical presence.

The physical presence precedent is the rule of thumb in all states. Congress has the power under the Commerce Clause of the U.S. Constitution “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” To date, Congress has not expressly granted states the authority to tax interstate sales (although it has had several opportunities to do so).

However, the Supreme Court of the United States has upheld the physical presence precedent. More than 25 years ago, North Dakota decided that the Quill Corporation’s catalog and phone sales in the state were substantial enough to create a tax obligation for Quill, even though it was based out of state. The resulting legal battle made it all the way to the Supreme Court of the United States, which ruled against the state in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

When Quill was decided, the internet was in its infancy and there was no such thing as a dot-com. The rapid growth of ecommerce since that time has made shopping a breeze in even the most remote parts of the country, but it has come at a cost. States reliant on sales tax for funding have seen revenue drop as untaxed internet sales by remote vendors have risen. Although consumers are supposed to remit use tax to the state if sales tax wasn’t collected on taxable sales at checkout, few actually do.

Indiana House Bill 1129 establishes an economic nexus policy that bases nexus on a business’s economic presence in the state, thereby directly challenging the physical presence precedent upheld in Quill. It is not the first state to throw down that gauntlet. The Indiana measure is similar to South Dakota SB 106, which was enacted in 2016 and found to be unconstitutional by a state circuit court earlier this spring — to the delight of state officials. South Dakota’s law was designed to be challenged to create an opportunity for the Supreme Court to overturn Quill. Read more: South Dakota happy its law is unconstitutional.

Indiana and South Dakota are working in concert with Tennessee and several other states to challenge the physical presence precedent upheld by Quill. They have the backing of the National Council of State Legislatures, which in 2016 created model legislative language for states to use to expand their sales and use tax collection requirements. It includes, as does Indiana’s measure, a provision to “accelerate litigation over any of these provisions.”

HB 1129 states that the Indiana Department of Revenue may “bring a declaratory judgment action… in any circuit court or superior court” against a person the department believes has an obligation to collect the state gross retail sales tax under the economic nexus law, to establish that:

• The person has an obligation to collect state gross retail tax; and
• The person’s obligation to collect state gross retail tax is valid under state and federal law.

It also commands any court in which action for a declaratory judgment is brought on this issue to act on it “as expeditiously as possible.” The department is prohibited from enforcing the economic nexus provision “during the pendency of the declaratory judgment action.”

Although it would be unusual for the Supreme Court to overturn a decision that has stood for so long, at least one justice has said a reconsideration of Quill is overdue. Justice Anthony Kennedy wrote in a concurring opinion in Direct Marketing Association v. Brohl (2014), “Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term. Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”

Of course, the opinion of a justice who is rumored to be retiring soon doesn’t guarantee a reconsideration of Quill. We cannot know what will happen until it happens. But we can prepare for any eventuality.

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