In a battle nearly 25 years in the making, state lawmakers and online retailers are poised to face off on the hotly contested issue of whether out-of-state retailers that have no physical presence in a state must collect state sales and use tax. Current law, which does not require retailers with no physical presence in a state to collect the sales tax, is derived from the Commerce Clause of the Constitution and two Supreme Court rulings, National Bellas Hess Inc. v. Dept. of Revenue of Illinois (1967) and Quill Corp. v. North Dakota (1992).
However, given the loss of sales and use tax revenue in states due to the emergence of online retailers, and the perceived unfairness to brick and mortar stores, states have taken significant action in recent years to retrieve sales tax from online transactions. In 1999, the National Governors Association (NGA) along with the National Conference of State Legislatures (NCSL) created the Streamlined Sales and Use Tax Agreement, which simplified remote sales tax collection for participating states (Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, Wisconsin, West Virginia and Wyoming.)
In 2008, states began expanding nexus and affiliate nexus laws, which provided that if a retailer had any vendors or affiliates residing in a state, the retailer would be required to collect and remit sales tax to the state. The nexus laws have been somewhat effective, however, some retailers have eliminated relationships in states that would trigger the sales tax collection requirements. The states that have expanded nexus definitions include: Alabama, Arkansas, California, Georgia, Illinois, Iowa, Kansas, Louisiana, Maine, Minnesota, Missouri, New York, North Carolina, Pennsylvania, Rhode Island, South Dakota, Vermont and West Virginia.
The landscape of the remote sales tax policy debate shifted dramatically earlier this year when South Dakota Republican Gov. Dennis Daugaard signed SB 106 into law. The legislation requires remote sellers to collect sales and use tax regardless of any physical presence in the state. The law became effective on May 1. Shortly before the law went into effect, the state sued four online retailers in an effort to force them to register with the state and collect its sales tax. The law requires out-of-state retailers to collect sales tax if they have more than $100,000 in sales, or 200 remote transactions, in South Dakota each year.
In response, the American Catalog Mailers Association and NetChoice sued the state, arguing that the new law is in direct conflict with established law governing remote sales tax. Given the content of the legislative findings of SB 106, challenging existing remote sales tax law appears to be the intent of the new law. The South Dakota legislature found that the new law places remote sellers in a “complicated position” given prior Supreme Court rulings.
In support of its new law, South Dakota lawmakers cited a more recent Supreme Court decision, Direct Marketing Association v. Brohl, in which Justice Anthony Kennedy made statements in a concurring opinion suggesting a reconsideration of the 1992 Quill ruling citing advancements in technology and consumer sophistication. Besides the court challenges that may ultimately place the decision back in the hands of the Supreme Court, NGA and NCSL has maintained pressure on Congress to pass legislation to establish a national framework for the collection of remote sales taxes. Remote sellers also face the possibility that other states may follow South Dakota lawmakers and pass similar legislation in 2017.