The administration ponders whether it can force Amazon Marketplace sellers to collect sales tax, even in states where they have no offices or warehouses.

Don Davis - Internet Retailer

Don Davis, editor in chief, Internet Retailer

For the last few months the editors at Internet Retailer have been wondering, “What does President Trump mean when he says Amazon isn’t collecting internet taxes?” After all, as we and others have reported, Amazon announced earlier this year that it would collect sales tax in all 45 U.S. states that have statewide sales taxes, even though the leading online retailer isn’t legally obligated to collect and remit sales tax in some of those states.

If Amazon is collecting sales tax everywhere, what other “internet tax” is Trump referring to?

I got the answer this morning from this article from CNBC, which quotes congressional testimony from Treasury Secretary Steven Mnuchin. He explained to a Senate committee that what Trump is referring to is the fact that many Amazon Marketplace sellers don’t collect sales tax in states where they don’t have a physical presence, such as a store, warehouse or office.

The big problem the Trump administration faces is the law of the land.

I’ll stop here for a brief explanation of why that is significant. The prevailing law on this question comes from the 1992 U.S. Supreme Court decision in a case called Quill Corp. v. North Dakota. In that case the high court ruled that Quill, which largely sold through catalogs, could not be required to collect and remit sales tax from residents of North Dakota because the office supplies retailer did not have a physical presence—nexus in legal terms—in that state.


That case was decided before online shopping existed, but it’s been applied to online retailers: They don’t have to collect sales tax in states where they don’t have a physical presence.

Retailers that operate stores have lobbied for a change in the law for at least a decade. They argue that online retailers have a price advantage over those that operate stores because the e-retailers don’t have to charge sales tax in many cases, making the total price lower for the consumer. And we all know consumers do gravitate to retailers that charge lower prices.

There have been many attempts to pass legislation in Congress that would change this law, but up until now there has been no action, though new sales tax proposals keep coming up in Congress. A big stumbling block has been conservatives who oppose any new taxes, and view requiring consumers to pay sales tax on all purchases to be a new tax. It’s true that consumers are supposed to voluntarily remit the sales tax on orders they place with out-of-state retailers to their state revenue departments, but everyone knows that hardly anyone does that.

From Mnuchin’s testimony, it appears the administration is considering whether it can force Amazon to require all marketplace sellers to collect sales taxes on sales made on


To be sure, marketplace sellers now represent a big part of online sales in the United States. As my colleague Allison Enright recently reported in a thorough report on Amazon, “Goods sold by merchants on Amazon’s Marketplace in the U.S. now are of such a quantity—over $57 billion—that sales by marketplace merchants on Amazon account for 14.6% of U.S. e-commerce, up from less than 5% five years ago. Looked at collectively, the $57 billion in goods sold by marketplace merchants on Amazon in the U.S. last year is just slightly less than the total web sales of Apple Inc., Wal-Mart Stores Inc. and Dell Inc., the second-, third- and fourth-largest online retailers in North America.”

Further drawing states’ attention to Amazon Marketplace sellers is the fact that so many of them now use Fulfillment by Amazon to handle warehousing of inventory and order fulfillment. With Amazon now operating some 140 distribution centers around the country, the states argue that many of these marketplace merchants now have nexus based on the location of their inventory. For example, if a seller based in George has inventory at an FBA warehouse in Michigan, Michigan can claim that the seller has nexus in the state and should collect sales tax from Michigan residents.

In fact, this has led to a recent initiative by the Multistate Tax Commission in which 19 states have agreed to offer amnesty to FBA merchants that now figure out what sales taxes they should have collected and remit them to the states. Those merchants would be exempt from any late penalties. We’ll see how many sellers choose to go through the process of figuring out how much they sold in each of those 19 states, and then paying out of their own pockets the sales tax owed.


That at least is a voluntary effort. But it seems the Trump administration is considering a more coercive approach that would force sellers on to collect and remit sales taxes, even in states where they don’t have a physical presence.

But it’s easy to see the problems that would arise from such a move. First of all, what about eBay, and all the dozens of other online marketplaces where outside merchants sell on a shopping portal? I doubt they force sellers to collect sales tax. Would they be included, as well?

But the bigger problem is the law of the land. The prevailing Supreme Court decision makes clear that retailers don’t have to collect sales tax in states where they have no nexus. If the administration moves in the direction it seems to be mulling, it’s pretty clear marketplace sellers would sue immediately.

Perhaps that’s what the administration wants, as that might get the issue before the U.S. Supreme Court more quickly than the pending challenges in the form of various state laws that explicitly take on the Quill decision. Alternatively, the Trump administration could file friend of the court briefs that side with such states as South Dakota, Alabama and Colorado that have passed laws that openly challenge Quill.


Either way, the challenges to Quill might prove successful. Clearly, online shopping has dramatically changed the retail landscape in the 25 years since the high court decided the Quill case. Supreme Court Justice Anthony Kennedy expressed his view in a 2015 opinion that it was time for the Supreme Court to review the question of online sales tax.

Sooner or later, this question is likely to get back to the Supreme Court. And it now appears that the growth of online marketplaces could be the wedge that gets the high court to reconsider the sales tax issue.