The battle between states and online retailers about when they are responsible for collecting and remitting sales tax to individual states took a new turn recently, as Amazon added Hawaii, Idaho, Maine and New Mexico to the list of states it collects sales tax in. This brings its total to 45 states plus the District of Columbia, and the remaining five states don’t have a general statewide sales tax.
Of course, while Amazon is among the largest online retailers, it’s not the only ecommerce platform, and there are a lot of different ways that sellers can reach customers across the country. Amazon’s decision was part of their larger business strategy, but the company’s size and status in the marketplace give the move wide-ranging implications for the future of sales tax legislation on several levels.
Direct Changes
In the immediate future, Amazon’s decision to collect and remit sales tax in all states with a statewide sales tax, whether they’re compelled by a physical nexus or not, only impacts sales made by Amazon or its subsidiaries. Third-party sellers and those who use Fulfillment by Amazon (FBA), still will only have an obligation to collect and remit sales taxes in a given state if they have a physical presence there themselves that triggers a nexus condition. That can still be having goods stored in an Amazon warehouse in the state in question, but that has been the case for some time.
Putting Things in Context
For many years, Amazon resisted efforts by states to compel it to collect and remit sales tax on purchases its customers made online. Over time, it became clear that state sales tax laws applied to online sales provided that the seller had a physical presence, or nexus, in the state. Amazon’s ever-expanding web of fulfillment centers, data centers and customer service centers began to create a nexus condition in more and more states, and so the list of places that Amazon had to collect sales tax in started expanding quickly.
This trend, coupled with multiple other factors, including the company’s shift towards enabling larger numbers of customers to access same-day and next day delivery options, have caused Amazon to switch from fighting sales tax collection to assuming the responsibility voluntarily. That is partly because expanding rapid delivery options means putting more physical distribution and other centers in more states, and partly because of the ways states have been exploring other types of nexus conditions besides those involving a physical presence.
Quill Corp. v North Dakota
One type of new law that several states have been attempting to implement involves the claim of economic nexus. These bills vary a bit from one state to another, but they typically revolve around the idea that any retailer making a certain volume of sales, measured in either dollar amount or number of individual transactions per year, has established a significant business presence in the state, and so should be required to collect tax on those sales.
Several of these laws have been challenged in court so far, and those lawsuits are likely making their way to the Supreme Court as part of an effort to overturn the 1992 decision in the case of Quill Corp v North Dakota. That case involved an out-of-state office supply retailer who provided proprietary software that some of its North Dakota customers used to place their orders.
The state claimed that the existence of the software created a nexus for the company, and so a responsibility to collect sales tax in North Dakota. In its decision, the Supreme Court ruled that the Commerce Clause of the Constitution only enabled a state to compel the collection of sales tax if the company had an actual physical presence, and it also added that requiring out-of-state sellers to comply with the myriad state and local sales tax regulations was far too complicated to be practical.
Streamlined Sales and Use Tax Agreement
Beginning in 2000, a group of states joined together in the Streamlined Sales and Use Tax Agreement (SSUTA) in an effort to address the complexity issue of forcing out-of-state retailers to comply with state sales tax laws. There are currently 24 states with full membership status in the SSUTA, and this means, among other things, that retailers going through the SSUTA can register for sales tax permits in all member states simultaneously.
These sellers can also submit only one return per state, rather than the multiple state and local returns that were sometimes previously required, and they can be sure that the items they’re selling face a uniform status in terms of taxability throughout each individual state.
The Importance of Sales Tax
The main reasons states are so committed to requiring the collection of sales tax on as many purchases as possible, and particularly on online sales, is that sales tax revenue makes up a sizable chunk of most state budgets. That revenue stream has been rapidly dwindling in recent years thanks to the growth of online selling, and it has led states to become more aggressive in their push to re-litigate the taxability of online purchases.
In this context, Amazon’s decision to voluntarily collect sales tax in places it’s not required to can lend validity to the states’ claims surrounding economic nexus due to new developments in technology and the changes in the way the economy functions that have occurred since the Quill decision. While the changes in Amazon’s policy may not directly or immediately impact other ecommerce platforms or small online sellers, it may be indicative of the direction regulations and legislation will be moving in the coming years.
