Arkansas has enacted a law that clarifies that retailers with stores in the state must collect sales taxes on any online purchases made by state residents.
As noted in the story above, under a 1992 Supreme Court decision, Quill Corp. v. North Dakota, states cannot compel out-of-state companies to collect sales taxes unless the company has a physical presence, or “nexus,” in the state. This would include a warehouse, office, or retail store.
But many national chains with stores in every state do not collect sales taxes on their online sales. These retailers—including Borders Books, Barnes & Noble, Target, Tower Records, and Wal-Mart—contend that their e-commerce operations are distinct legal entities unrelated to their physical stores. Their internet stores therefore lack nexus and are not required to collect sales taxes. The legal term for his practice is “entity isolation.”
The Arkansas legislation clarifies existing tax law to indicate that entity isolation does absolve retailers from their responsibility to collect sales taxes. The legislation says that a company processing orders remotely by fax, phone, or the internet must collect sales tax if 1) the company has a substantial ownership interest in, or is substantially owned by, a retail company with stores in the state, or 2) the company sells a similar line of products under a substantially similar name as a company operating stores in the state.
“The states have to do something to stem this tide and to protect their local merchants who have been faithfully collecting this tax,” said Tim Leathers, deputy director of the Arkansas Department of Finance and Administration.
According to advocates of sales tax fairness, clicks-and-mortar retailers are obligated in most states under existing law to collect sales tax. But, until the recent California decision (see story above), enforcement officials have failed to take action against these companies.
Enacting new legislation can clarify existing law and spur enforcement. Thus far, Arkansas is believed to be the only state to do so. A similar law passed the California legislature last year, but was vetoed by the governor.
Wal-Mart, headquartered in Bentonville, Arkansas, likely played a major role in pushing the legislation through the state legislature. Wal-Mart has been an ardent supporter of requiring all retailers to collect sales taxes—even though, hedging its bets, it established Wal-Mart.com as a separate entity that does not collect sales taxes in most states.