Remote Sales Tax Collection

 

State legislatures are constantly working to keep revenue streams current with the rise of e-commerce by pursuing a variety of mechanisms to expand the bounds of their taxing authority. But in June 2018, the U.S. Supreme Court, in South Dakota v. Wayfair, found that physical presence in a state is no longer a necessary precondition for requiring a retailer to collect sales and use taxes. This opened the door for states to expand their taxing authority on online purchases. 

Quill v. North Dakota (1992) 

In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that the dormant Commerce Clause requires a retailer to have a sufficient physical connection with a state for that state to require the retailer to collect sales/use taxes. E-commerce, however, makes it easier for businesses to participate in state markets without any of the usual indicia of “substantial nexus” as articulated in Quill, such as stores, warehouses, distribution centers, or corporate offices. The result is that revenue from taxes which are due and payable are not being collected or remitted to states and local governments. 

In the quarter-century after Quill, states searched for ways to expand the meaning of “physical presence” (which the Court has not defined precisely) to extend sales tax collection responsibilities to additional retailers. These efforts took a variety of forms. Most of these laws fall under the general umbrella of “attributional nexus”: contending that the non-collecting retailer has nexus by virtue of the activities of another (attributing the nexus of another entity to the non-collecting retailer).

The most common early example was “affiliate nexus” laws, which require remote sellers to collect and remit tax if another affiliated legal entity had nexus in the state (e.g., a book store creates nexus for a separate but affiliated online book site). There were many different flavors of these laws (e.g., “drop ship nexus").

States also enacted laws to attribute the activity of unrelated parties to non-collecting retailers. For example, if a retailer sold products that came with warranties, states would attribute nexus to the non-collecting retailer based on the activities of the unrelated warranty service company, who the states contend was acting as an agent on the non-collecting seller's behalf. The most widely discussed version of these “agency nexus” laws are the “click-through” nexus provisions. Under click-through nexus laws, states presume that a seller has nexus if it exceeds a certain sales threshold and if it receives online sales referrals from those in the state. Nearly every state with a sales tax has enacted one or more of these types of provisions. 

South Dakota v. Wayfair (2018) 

The state approach to the issue shifted dramatically in 2016, when South Dakota passed a law (SD SB 106) intended to challenge Quill. Unlike previous efforts that sought to work within the Quill framework, the authors of the new South Dakota law were under no illusions that they were enacting a law that would pass constitutional muster — the purpose of the law was to test whether Quill remained good law. And the state didn't act without prompting: it was responding to an invitation from Justice Kennedy for a case to test Quill.

The South Dakota law says nexus with the state can be established with sufficient economic presence — no physical presence required. The law specifies a seller has nexus and must collect sales tax if it makes more than $100,000 in annual sales into the state or has more than 200 discrete sales into the state. 

The idea caught on in other states, rising from only a handful of similar bills in 2016 to nearly twenty in 2017 and 32 in 2018. Nearly half of all state sales tax nexus legislation in 2018 contained an "economic nexus" provision.

Post-Wayfair

In the wake of the Wayfair decision, states acted quickly to adopt South Dakota-style thresholds requiring retailers who sell more than a specific dollar amount ($100,000 in South Dakota) or in excess of a specific number of transactions (200) to collect sales tax. All but five of the 45 sales tax states have — either by legislation or regulation — specifically adopted an economic nexus threshold similar to South Dakota. 

Marketplace Facilitator

The real story following the Wayfair decision is that states are extending the sales tax collection obligation to marketplaces. Extending sales tax collection to marketplaces is driven in large part by the reality that most uncollected sales taxes from online sales are from sales over marketplaces. Prior to 2019, 12 states required marketplace facilitators to collect sales taxes on their transactions. As of May 2019, 26 states and the District of Columbia have marketplace facilitator collection provisions.

Streamlined Sales and Use Tax Agreement

Another related issue state legislatures are discussing is the continued simplification of the sales tax. Marketplace collection is a form of simplification in that it shifts the burden of collection from small sellers to larger — often very large — marketplaces. In response to the Quill ruling in 1992, the National Governor's Association and the National Conference of State Legislatures created the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA simplifies the registration process for businesses operating in multiple states. There are currently 23 SSUTA states as of May 2019. 
 

Research & Resources

Chamber Resources

Research

Journalism & Opinion