Two states admit their law requiring out-of-state online retailers to collect sales tax violates federal law. Can they do that?

I was glad to see the Wall Street Journal’s editorial board raise an important issue in the WSJ on online sales tax: Two states are openly violating federal law by requiring out-of-state online retaileres to collect and remit sales tax.

Those states are South Dakota and Alabama requires e-retailers to collect sales tax, both of which this year began requiring all online retailers with sales above a threshold amount to collect sales tax and send it to the state. Both have admitted that their laws contradict the U.S. Supreme Court decision on sales tax collection by retailers with no physical presence in a state. That 1992 decision, Quill v. North Dakota, ruled that only retailers with some kind of physical facility in a state—such as a store, warehouse or office—have to collect sales tax on purchases by resident of that state and send it to state revenue officials.

Retailers that operate stores claim the Quill decision today gives online retailers—which didn’t exist in 1992, though catalog retailers were flourishing—an unfair advantage in that their total prices, without sales tax, can be lower. But there are reasons for not imposing tax-collection burdens on out-of-state retailers. For one, they don’t rely on state and local services, such as road repair, police and fire protection, and school systems.

For another, as the Journal points out, the legal basis of the Quill decision relied on the court’s view that the authors of the U.S. Constitution aimed “to prevent state governments from placing suffocating tax and regulatory burdens on interstate commerce.” That includes imposing laws on companies not based in their states.

There are arguments on both sides, of course, and Supreme Court Justice Anthony Kennedy invited states to challenge Quill in an opinion he wrote last year. They can do that by lobbying Congress to give states the right to require sales tax collection by out-of-state retailers. Congress has considered such legislation over the last several years and has chosen not to act.


The Journal editorial concludes as follows: “If states want to reach outside their borders to harass businesses nationwide, they can coax Congress to give them that power. Until then is it too much to ask that government officials obey the existing law?”

That’s a good question.