From Tax Foundation
States for years have grappled with how to require online sellers to collect sales taxes. With their tax bases starting to dwindle, policymakers have turned to increasingly aggressive legal interpretations to mandate sales tax collection from out-of-state businesses. Unfortunately, without a simplified congressional solution, remote sellers could face a complex web of state sales tax regulations that create substantial compliance costs.
Because of these varying sales tax rules, in the 1992 Supreme Court case Quill Corp. v. North Dakota, the Court ruled that a state could only require a seller to collect taxes if it had a physical presence (or nexus) in the state. After lobbying Congress for years to address the issue, states have taken the matter into their own hands by expanding nexus laws.
Recently, some states have gone one step further by attempting to ignore the physical presence standard and instead impose an “economic presence” standard. Mostly, these new laws say that after a company passes a certain amount of sales revenue in the state, they have established an economic presence and should therefore collect sales taxes. The hope is that if enough states pursue the issue, one of two things will happen: either Congress will act on the issue or the Supreme Court will agree to hear a case that could overturn the Quill decision.
South Dakota was the first state to pass legislation directly challenging Quill, and a legal challenge is making its way through the court system. Maine lawmakers recently passed similar legislation that is now at the governor’s desk. Both states would require remote retailers to collect sales taxes if their revenue in the state exceeds $100,000. They realize that these laws violate the Quill decision and want the Supreme Court to reevaluate that case. South Dakota stated this intention in court and Maine explicitly acknowledges this in its bill. These states aren’t alone in their desire for a new Supreme Court decision. Alabama, Tennessee, and Massachusetts have sought to impose an economic presence standard through the regulatory process.
States are also starting to consider laws that go after third-party sales facilitated by marketplaces, such as Amazon and eBay. For both these companies, smaller retailers use the online platform to sell their own goods. Even if South Dakota’s economic presence law were enforced, direct sales by Amazon and sales by smaller companies using Amazon’s marketplace could face different treatment. Minnesota has adopted and Washington is considering legislation to address third-party sales by imposing collection requirements on marketplace platforms. The National Conference of State Legislatures released model legislation on marketplace platforms in January 2016.