Online Sales Taxes In The United States
Here's what you should know about online retailers and sales tax nexus
Since online shopping became popular in the 1990s, the issue of collecting sales tax on purchases made online has been an enormous issue for both consumers and merchants alike. The controversy began in 1992, long before retailers such as Amazon.com opened their doors, with the groundbreaking Supreme Court decision of Quill vs. North Dakota, which ruled that only merchants with physical nexus in a state could be required to collect sales taxes for that state.
With the rise of Amazon and online sales taxes, state governments began to fight for the right to enforce the collection of sales taxes from out of state merchants shipping products to their citizens. This fight led to the landmark 2018 Supreme Court Case South Dakota vs. Wayfair Inc,., Et Al., which overturned the previous Quill vs. North Dakota decision and established the states' right to determine when and how to collect sales taxes from any out of state corporations making sales within their borders, whether or not they have physical nexus.
South Dakota vs. Wayfair Inc, Et Al. (2018)
In this landmark case, South Dakota appealed to the courts to uphold their recent legislation forcing out-of-state online retailers such as Wayfair to collect and remit the South Dakota Sales Tax on all sales made within their borders. Wayfair and other online retailers fought this, claiming that their lack of "nexus", or physical infrastructure or employees within the state, should exempt them from the requirement to collect South Dakota's state and local sales taxes (as held by Quill vs. North Dakota).
In a 5-4 ruling in favor of South Dakota, the court held that all states should have the ability to collect sales taxes from all merchants selling within their borders, regardless of whether they have physical nexus in the state. The decision overturned the previous Quill ruling, which the court claimed was made prior to the "present realities of the interstate marketplace", and cost the states over $33 billion in lost sales tax revenues while placing physical merchants at a disadvantage to their online counterparts. The Court noted the following reasoning in the majority opinion:
“Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill.” ... ” Further, the real-world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the “far-reaching systemic and structural changes in the economy” and “many other societal dimensions” caused by the Cyber Age.”
While the South Dakota legislation argued in court limits their out-of-state collections to merchants with significant transactions in the state (at least $100,000 in revenue or 200 transactions), there are no such restrictions imposed by the Supreme Court. States are free to set their own limitations on which businesses are required to collect their sales taxes, which will likely determine the extent to which this ruling imposes hardship on small Internet-based retail businesses nationwide.
Quill vs. North Dakota (1992) OVERTURNED
The Quill corporation, a office-supply company, provided their customers with an early form of online ordering using a floppy-disk-based catalog. Customers nationwide placed orders through the computer system, which the Delaware-based Quill then shipped. The government of North Dakota attempted to force Quill to collect and pay sales tax from all orders placed within the state, arguing that the catalog floppy disks used by Quill's customers established a "physical presence", or "nexus" within the state.
Constitutional provisions against state regulation of interstate commerce only allow states to require businesses with a physical presence (nexus) within the state to collect sales taxes from that state's residents. The Supreme Court ultimately threw out North Dakota's tax claim, establishing that because Quill had no physical locations or personnel located within North Dakota they could not be required to collect North Dakota sales tax.
This ruling stood for years, and most Internet-based businesses were only required to collect taxes from customers who resided in the same state as the company itself was based in (and for this reason, many companies established offices in sales-tax-free states such as Delaware). However, as Internet sales became more common and state budgets grew tighter, several states began passing so-called "Amazon laws" in order to force some of the largest Internet retailers to collect and pay sales tax on their behalf.
Amazon's Legal Battles & The Dawn Of Online Sales Taxes
"Amazon laws", named after the Internet retail giant that sparked them, were the first volleys in the battle between states seeking to collect Internet sales taxes and the Internet retailers who sought to avoid them. For a decade, Amazon fought a back-and-forth battle with states that tried to wrest back the billions of dollars in sales taxes that were lost as more and more consumer purchases went online.
2009: Amazon Dumps Affiliates To Dodge Sales Taxes
In these laws, states re-defined the concept of "nexus" to include independent sales agents located in a state as a "physical presence", which could be used to require Internet retailers to then collect sales tax in that state. Amazon.com and other large internet retailers frequently use a network of independent affiliates worldwide to drive traffic to their sites. As a result of the Amazon laws passed in several states, Amazon and other businesses were forced to either start collecting sales tax in those states or dismiss all affiliates located within state borders.
In an early example, when Rhode Island and North Carolina adopted Amazon taxes in 2009, Amazon immediately severed ties with all affiliates in the two states in order to avoid collecting sales tax from residents. With larger states such as New York with similar laws, however, most retailers had no choice but to collect state sales tax in order to retain their local affiliates.
2017: Amazon Gives Up, Collects Sales Taxes Nationwide
Despite several years of legal wrangling to avoid nexus in states that would force Amazon.com to collect and pay sales taxes, as of April 1 2017 Amazon agreed to collect and remit sales taxes for their own direct retail sales in all states nationwide. Amazon also has started collecting sales taxes on the behalf of third-party merchants (who account for over 50% of sales on the site) in several states such as Washington and Pennsylvania.
2018: Supreme Court Ruling Cements States' Taxing Ability
The new Supreme Court ruling, combined with the eagerness of states to expand their sales tax revenues, is worrying to the millions of of small businesses with an Internet presence. One boon to small businesses is that many states' newly enacted sales tax collection laws have a minimum revenue threshold ($5,000 to $10,000) that in-state sales must reach before it can be considered a sales nexus with enough weight to justify mandatory sales tax collection.
The Future For Online Retailers: Collecting Sales Tax Nationwide
The short-answer for online businesses is that, while it's important to research sales tax law in the states you sell to, chances are that you will be required to begin registering and collecting sales taxes in the majority of states as your revenues begin to grow past a minimum level. For customers shopping online, it's the vendor's responsibility to collect sales tax when it is due, and as time goes on the once ubiquitous sales-tax-free shopping online will become harder and harder to find.