States are queued up and ready to begin taking in sales tax revenue by out-of-state online retailers and marketplace sellers.
The U.S. Supreme Court on Thursday overturned the 1992 decision in Quill Corp. v. North Dakota, which exempted online retailers from having to collect tax on orders placed by residents of states where retailers did not have a physical presence.
Congress has introduced, but failed to pass, numerous bills over the years that would enable states to collect sales tax from online retailers that do not have a physical presence within their state.
But 16 revenue-hungry states have passed some form of online sales tax legislation and additional states are working to pass their own laws.
Nine states—Georgia, Tennessee, Indiana, Wyoming, Colorado, Alabama, Massachusetts, North Dakota and South Dakota—have tax laws about online sales in effect, but which have largely not been enforceable, due to Quill. Six additional states—Illinois, Iowa, Connecticut, Hawaii, Kentucky and Vermont—have enacted laws modeled after the South Dakota law at the center of the Supreme Court case that are set to go into effect by January 1, 2019 (see chart). Maine has also passed a law. While the Supreme Court overruled Quill in its decision, it is unclear at this time whether states will be able to or are ready to enforce these laws. Experts expect more court challenges and litigation.
“Most [states] will work quickly and judiciously to reclaim their authority and create a level playing field for all retailers selling to customers in their states,” says Deborah White, general counsel for the Retail Industry Leaders Association, a retail industry trade group that supported the court’s decision. Louisiana, for instance, introduced three bills modeled after the South Dakota legislation earlier this month.
When North Dakota passed its law last year, it set the effective date as the day the Supreme Court “issues an opinion overturning Quill v. North Dakota.” In other words, Thursday, June 21. “Over the next few weeks, our office will be working to implement this new law change,” said Ryan Rauschenberger, North Dakota tax commissioner, in a prepared statement. The homepage for the North Dakota tax office on Friday featured the message: “Attention Remote/Online Sellers Your Sales Tax Collection Requirements Have Changed.”
The laws that have been passed vary by state, but most set minimum thresholds about sales and transactions. For instance, the South Dakota law at the center of the South Dakota v. Wayfair case requires out-of-state merchants selling at least $100,000 worth of goods or conducting at least 200 sales transactions with South Dakota residents collect and remit sales tax to the state. Other states set the threshold at $250,000 or more.
The states want the tax revenue that consumers are required to pay to their states on their out-of-state purchases, but few do. The U.S. Government Accountability Office in December estimates states could be missing out on $8.5-$13.4 billion in revenue due to consumers not paying up.
Alabama, which has had its tax law about remote sellers in effect since 2015, requires retailers selling more than $250,000 worth of goods into the state to collect an 8% tax. It set up a voluntary registration program for retailers to do so, and more than 200 online retailers have signed up since 2015. By signing up with the state voluntarily and remitting the 8% tax, the retailers are exempt from the payment of individual local taxes, such as county or city taxes.
Among the retailers that have registered are TheRealReal Inc. (No. 184 in the Internet Retailer 2018 Top 500), L.L. Bean (No. 35), Stitch Fix (No. 59) and PersonalizationMall.com (owned by Bed Bath & Beyond, No. 60). (See the full list here.) Alabama says it collected $52 million in tax through the program during the last fiscal year.
A complicated tax policy
About a fifth of online retailers ranked in the Internet Retailer 2018 Top 500—the 500 largest online retailers in North America by their online revenue—don’t collect sales tax beyond their home states. The complications inherent to having to comply with the laws of different states and tax jurisdictions is why some groups want Congress to act.
“It should be Congress, not the courts, that sets the rules for interstate sales tax collection,” says Chris Cox, outside counsel for NetChoice, an e-commerce advocacy organization.
There is a second layer of tax laws pertaining to online merchants in play, as well. A growing number of states are passing laws requiring online marketplace operators to either report or collect and remit sales tax to the state for the sales they help facilitate. At least seven states—Pennsylvania, Washington, Rhode Island, Connecticut, Oklahoma, Minnesota and Alabama—have passed such laws. The U.S. Government Accountability Office in December estimated states could be missing out on $3.9-$6.2 billion in revenue from sales transacted on marketplaces, such as Amazon (No. 1 in the Top 500), eBay and Etsy, Nos. 4 and 13 in the Internet Retailer 2018 Online Marketplaces, respectively.