Logistics Brief


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Sales Tax Nexus and the Internet – A New Landscape 2015

by Robert A. Goldstein and Matthew Dopkin

Five years after the Great Recession blasted large holes in government budgets, many states are still struggling to balance their books. 16 states are expected to have significant budget deficits over the next two years in the face of the rising costs of education, Medicaid, health care, and pensions and retirement benefits. Unlike the federal government, states generally can’t run at a deficit. 49 states have constitutional or statutory provisions requiring a balanced budget. These deficit challenges have resulted in states scrambling to find new sources of revenue – with the taxation of internet based sales perceived as a “pot of gold” by some states.

It is estimated that the U.S. now generates almost $400,000 of e-commerce every thirty seconds.  On-line sales made through Amazon, Overstock, eBay, and the like create a challenge for many state taxing authorities; how to impose an obligation to collect tax on out-of-state sellers?  Historically, states have been limited by a physical presence nexus standard. If a retailer had an in-state physical presence, then nexus was established and sales tax had to be collected at the point of sale.  This physical presence requirement was satisfied by a store, warehouse, other physical location or when a business had employees conducting activities within a state. The physical presence requirement was originally detailed by the U.S. Supreme Court in the 1960s, and was revisited by the Court again in the 1992 ruling Quill Corp. vs. North Dakota (“Quill”)Quill held that out-of-state sellers do not have the requisite nexus to collect sales taxes on their transactions in states where they lack a physical presence.

Fast forward to our present environment in which states seem to be side-stepping the physical presence requirement of Quill in an effort to address budget shortfalls. New York and Illinois led the charge against internet retailers by imposing a sales tax collection responsibility on out-state-sellers lacking a direct in-state physical presence. This was done by applying agency law to create a new nexus concept called “click-through nexus.”  Approximately 25 other states now either have, or are considering, statutes similar to New York’s.

New York and Illinois specifically targeted Amazon’s business model whereby unrelated associate entities received commissions in the form of a percentage of Amazon’s on-line sales related to the click-through referral from the associate’s website. Under the New York and Illinois “Amazon Laws,” the associate is considered an agent of Amazon. As such, the associate’s in-state presence is imposed upon Amazon, and the out-of-state seller is treated as having the in-state physical presence of their associate. Accordingly, out-of-state sellers were required to register for sales tax purposes and to collect state and local sales taxes on all in-state sales despite lacking a direct physical presence within these states.

The Amazon Laws were challenged in both New York and Illinois, resulting in the Illinois statute being struck down by the state’s Supreme Court, although the New York statute survived several appeals. The distinguishing element between the New York and Illinois statutes was the fact that New York’s statute created a rebuttable presumption of nexus, while the Illinois statute did not.  Amazon appealed New York’s holding to the U.S Supreme Court, but cert was denied. The prior reluctance of the U.S. Supreme Court to address the physical presence matter may change, however, based upon recent comments by Justice Anthony Kennedy. In a just-issued concurring opinion to an otherwise technical ruling, Justice Kennedy invited a challenge to the Quill decision.  The Justice said he believes the Quill decision is outdated based upon the huge increase in remote sales, and the resulting impact on the states, since that case was decided. Furthermore, the Senate just re-introduced a bipartisan bill aimed at making it easier for states to collect sales taxes on online purchases – the Marketplace Fairness Act passed the Senate in 2013 but was stalled in the House. If enacted, the Marketplace Fairness Act of 2015 would give states the option to require out-of-state businesses, such as those selling online or through catalogs, to collect sales and use taxes.

Retailers should monitor and review their business plans, state statutes, a possible Supreme Court challenge to Quill and potential Marketplace Fairness Act legislation to ensure they are in compliance with sales tax collection responsibilities as a result of selling on the internet.


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