CLAIRE ARRITOLA — Within our lifetime, the Internet has changed the world. It has changed the way that we work, the way we interact, and the way we seek to purchase necessary products and discretionary items. With the power of the Internet, you may purchase anything, from anywhere, without the seller having a physical location within any given state; therefore, depriving any state of jurisdiction over sales tax. While this reality has greatly improved the flexibility and options for American consumers, it has greatly limited the ability of states to collect much-needed revenue from a sales tax. The inability of state governments to effectively collect sales tax revenue from online retailers also creates an uneven playing field in comparison to “brick and mortar” establishments that must always collect a sales tax and remit that amount to the state government. Sales tax revenues are extremely significant as they “account for approximately $150 billion [in the United States] annually and constitute about one-third of state revenues.”
Traditionally, a state may require a seller to collect a sales tax on behalf of the state if the “seller has a ‘substantial nexus’ in the taxing state,” a test upheld by the 1992 Supreme Court case, Quill Corp v. North Dakota. Since the Quill Corp. decision, courts have struggled with the application of the substantial nexus test. In Scholastic Book Clubs v. State, the Michigan Court of Appeals decided that teachers who were ordering and delivering student books from out-of-state book companies did not qualify as local salespersons and did not satisfy the substantial nexus test. Quill Corp. has been cited by many state revenue departments and has been interpreted through further case law, such as in Brown’s Furniture, Inc. v. Wagner, to mean that “a company may have the ‘minimum contacts’ with the state required by the Due Process Clause, and yet lack a ‘substantial nexus’ with that state as required by the Commerce Clause.” The Brown’s Furniture interpretation of Quill Corp. represents the old legal framework of analyzing whether a state has jurisdiction to require a retailer to pay sales tax. The 21st century, however, has provided for new ways to require online retailers to remit sales tax revenue to the state governments.
Another way for a state to have jurisdiction over a retailer is for the state to be a member of the Streamlined Sales and Use Tax Agreement (“SSUTA”) if the seller has voluntarily registered to collect tax. This agreement is the product of cooperation among forty-four states and the District of Columbia in order to simplify sales tax. The SSUTA encourages “remote sellers,” those selling over the Internet to collect sales tax on “sales to customers living in Streamlined states.” As of January 2015, twenty-four states have passed legislation conforming to the SSUTA.
Many states have passed legislation to address the issue of sales tax on Internet sales; one such example is a law passed by the state of New York in 2008. The New York law forces online retailers to collect sales taxes on shipments to New York residents. Amazon challenged this law by filing a lawsuit that was promptly dismissed from New York State Supreme Court (the lowest court of New York state). In its complaint, Amazon argued that the law was overly broad and vague, that a use tax should be used to collect taxes on these sales, and that it should be the responsibility of the customer, not the retailer, to remit such a tax. The New York Court determined that the law was narrowly tailored and not overly broad or vague. As of January 2015, Amazon maintains that items sold by Amazon and shipped to residents of 23 states listed on their website will be subject to a sales tax.
In 2011, a federal solution to this issue was proposed in the form of the Marketplace Fairness Act, S. 743, 113th Cong. (2013) (passed by Senate). The Marketplace Fairness Act has been introduced in the House and in the Senate, and it passed in the Senate in May of 2013. The Marketplace Fairness Act has not yet been enacted. The legislation aims to require all ” ‘remote sellers‘ doing $1 million of revenue or more to collect taxes for every state and jurisdiction where they have customers.” The legislation is meant to level the playing field for smaller, local retailers. Many worry, however, that the administrative burden will be crushing for smaller businesses and that this bill will actually concentrate power in the hands of large online retailers. As of January 2015, the bill remains in limbo, while states continue to lose billions in tax revenue. The National Conference of State Legislatures has estimated that states lost more than $23.3 billion in 2012 from tax revenue on uncollected online transactions. The uniform imposition of sales tax on online sales is a topic to watch for in 2015, as many changes may be on the horizon. These changes would greatly affect the ability of states to collect tax revenues, change the costs of doing business for many smaller online retailers, and create possible benefits for brick and mortar sales establishments.
