Are the days of shopping online free of sales tax coming to an end? If certain senators get their way, they could be.
In a 1992 decision, the Supreme Court held that a business must have a physical presence – a “nexus” – within a state in order for that state to require the business to collect a sales tax. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). This rule has enabled online retail companies such as Amazon.com to reap significant profits while not having to pass along a sales tax to their customers. In its decision in Quill Corp., the Court stated that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” Id. at 318.
As states search for more money in a tough economic climate, Congress is beginning to exercise the power the Court gave them. It is considering proposed legislation that would allow states to tap into this previously untouched revenue. The Main Street Fairness Act, sponsored by Sen. Dick Durbin (D – Ill.), would allow states to require online and mail-order retailers to collect state and local sales taxes.
The amount of money states could collect through such a change in the law is substantial. The National Conference of State Legislatures estimates that nationwide, the estimated total is more than $11 billion.
A number of states have already enacted laws that address this issue. In 2008, the New York Legislature passed a bill that expanded the definition of nexus to include certain online retailers, including Amazon. Under the State’s law, an online retailer has nexus in New York and must collect sales tax if their sales affiliates in the state generate more than $10,000 in annual revenue for the retailer. Amazon brought suit and alleged the law violated both the commerce and due process clauses, but the state Appellate Division determined that the New York law was constitutional. See Amazon.com, LLC v. New York State Dept. of Taxation & Fin., 2010 NY Slip Op 7823 (N.Y. App. Div. 1st Dep’t 2010). California, Illinois, Connecticut and several other states have passed similar legislation during the past few years.
From a legal perspective, it is significant to consider the implications such a law would have for companies and entrepreneurs who conduct business online. It is likely that at the very least, items such as the terms and conditions and sales total pages of such a company’s website would have to be modified to reflect such a revised law.
© 2011 Nissenbaum Law Group, LLC