Monday 2013 was the biggest online shopping
day in U.S. history. It was also the day the U.S.
Supreme Court refused to hear a constitutional
challenge by Amazon and Overstock to a 2008 New York
law that requires out-of-state online retailers to
collect sales tax if they use in-state affiliates to
direct traffic to their websites.
Several states -- including New York, Illinois,
Texas and California -- have enacted these so-called
"Amazon Laws," prompting a debate on whether it's
fair to require out-of-state online retailers to
collect sales tax. This debate pits online retailers
and consumers against state taxing authorities and
traditional brick-and-mortar stores.
Significant dollars are at stake in the online sales
tax debate. For example, online sales are expected
to grow 15 percent to $78.7 billion in November and
December 2013, according to Forrester Research.
Using an average state sales tax rate of about 5.6
percent, $4.4 billion could be on the table this
holiday season alone. Many online retailers are not
currently collecting sales tax. But that situation
could change in the near future.
Sales Tax History Lesson
If you operate a brick-and-mortar store, collecting
sales tax is pretty straightforward. You typically
charge customers sales tax based on applicable state
and local rates where your business is located.
Sales tax laws vary from location to location. Some
states charge different sales tax rates for
different items. For example, cigarettes and alcohol
typically have a higher sales tax rates than food.
(In many states, food purchased for home consumption
is exempt from sales tax.) Cities and counties may
levy additional taxes on purchases, too.
A landmark 1992 Supreme Court case -- Quill Corp.
v. North Dakota -- determined that mail order
retailers must have a substantial physical presence
(or nexus) in the state in order to be required to
collect sales tax from customers. In addition to a
storefront, nexus also might include a warehouse,
factory, office or employees in a given state. The
rationale behind the Quill decision was that
requiring out-of-state retailers to collect varying
levels of state and local sales taxes is burdensome,
especially for small businesses.
Today, the "physical presence" requirement set forth
in Quill has been extended to online
retailers. But some states have decided that
physical presence is an outdated concept in a
digital world. They argue that current technology
simplifies the process of collecting sales tax for
products sold across state lines, thereby
eliminating the rationale underlying Quill.
States that seek additional tax revenues have
enacted "Amazon Laws," which extend the concept of
nexus to include the use of in-state affiliates to
direct business to retail sites operated across
state lines. For example, if a museum located in New
York directs traffic to an out-of-state Internet
business, the site must collect sales tax from New
York residents, even if it has no other physical
presence in New York. Amazon Laws essentially treat
affiliates similar to operating a sales force within
Amazon Laws have received a mixed response from the
courts. The Illinois Supreme Court sided with Amazon
and overturned that state's online sales tax
collection requirement in 2013. But the New York
Supreme Court upheld its Amazon Law -- although the
U.S. Supreme Court refused to hear an appeal of this
case in early December.
The Court's refusal doesn't set any legal precedent,
but it paves the way for more states to enact Amazon
Laws. The refusal also might pressure Congress to
standardize the rules governing online sales tax
Proposed Marketplace Fairness Act
Last May, the Senate passed the Marketplace
Fairness Act, which aims to simplify the sales
tax collection process for online retailers. But the
bill stalled in the House. In a nutshell, the
proposed legislation would require Internet
companies with more than $1 million in annual sales
to collect sales tax on purchases made by consumers
and businesses in states that meet certain
requirements. Online retailers with $1 million or
less in annual sales (and without nexus in the
state) would continue to be exempt from collecting
In exchange for the right to collect online sales
tax, a state would be required to provide retailers
with free calculation software and a rate database
for goods or property sold in their jurisdiction.
Many online and big box retailers -- including
Walmart, Target and Amazon -- currently support the Marketplace
An Ongoing Debate
The future of online sales tax legislation remains
uncertain. But proactive retailers can take steps to
address the sales tax issue today. For example, some
retailers voluntarily collect sales tax on all
online purchases without waiting for states to
At a minimum, anyone who sells goods or property
online needs to stay on top of emerging state and
federal sales tax collection laws. Consult with your
tax and legal advisers to decide on the most prudent
courses of action in the states where you do
For more detailed information, please call Robert
Puerto at 516-248-7361 or click
here to email Robert Puerto. He would be happy to
address any questions
you may have.
Thomson Reuters/Tax & Accounting