Internet Sales Tax Fairness

Date: 8 Jan 2013 | posted in: Retail | 2 Facebooktwittergoogle_plusredditpinterestmail

(Last updated: July 7, 2016)

In 1992, the U.S. Supreme Court ruled in Quill Corporation v. North Dakota that there was nothing inherently unconstitutional about requiring out-of-state retailers (such as mail order companies and internet retailers) to collect state and local sales taxes on orders shipped to in-state residents.  The only question was whether imposing such a requirement would cross the line from an acceptable burden on interstate commerce to an unreasonable one. Technology had greatly eased the burden of collecting taxes for multiple jurisdictions, the Court noted, but concluded that Congress should make the call.

The Court’s ruling left existing policy, under which remote retailers must collect sales taxes only in states where they have a physical presence or other tangible “nexus,” unchanged.  But the Court explicitly invited Congress to revisit the policy. “The underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve” the Court wrote.

Today, software and related tax services have largely eliminated any remaining difficulty in calculating and remitting sales taxes for the country’s many state and local jurisdictions. Yet Congress has so far failed to extend sales tax collection to online retailers.  The result is a public policy with at least three pernicious impacts:

  • It disadvantages local businesses.  Exempting online retailers from having to collect sales tax, as regular stores must, gives these companies a 4 to 11 percent price advantage over local stores — a sizable competitive advantage in retailing.
  • It undermines state and local governments by reducing tax revenue for schools, police, and other services.  This revenue loss that will only grow as internet sales continue to displace in-store sales.  Currently, 45 states assess sales taxes, from which they receive about 25 percent of their total revenue each year.  A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost states $7.7 billion in 2008 and projected annual losses of $11.4 billion by 2012.  That figure grows to $23.3 billion when catalog phone and mail order sales are included.
  • It makes a regressive tax more regressive, because only those with internet access, a credit card, and a home or workplace where they can accept daytime deliveries are able to take advantage of the tax exemption.

(It is important to note that, while remote sellers are not required to collect sales taxes, the tax is still owed by the individual who made the purchase.  Individuals are supposed to keep track of these purchases and pay an amount equivalent to the sales tax as a “use” tax on their state tax returns.  Less than 1 percent of people do, however, and the use tax is almost impossible to enforce, which effectively exempts these purchases.)

In March 2015, U.S. Supreme Court Justice Anthony Kennedy wrote in an opinion that the Quill decision inflicts “extreme harm” and is long past due for review. “It is unwise to delay any longer a reconsideration of the court’s holding in Quill,” Kennedy wrote. “A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier… The result has been a startling revenue shortfall in many states, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.”

In the aftermath of that opinion, a number of states have taken steps to challenge Quill.

Federal Legislation

There are two primary strategies that states are pursuing to move toward a level playing field in which all retailers are subject to the same sales tax requirements.

One involves persuading Congress that collecting sales taxes for numerous state and local jurisdictions is no longer a burden for remote sellers.  As noted above, software makes complying with state and local sales tax rules much simpler than when the Supreme Court issued its 1992 ruling.

The Marketplace Fairness Act, which was introduced in the Senate by Senator Mike Enzi and 29 others, would authorize states that have simplified and aligned their sales tax rules to require large online and catalog retailers to collect sales taxes.  (Small online and mail order retailers with less than $1,000,000 in out-of-state sales would still be exempt.)

In order to meet the bill’s requirement of a simplified sales tax system, states must either 1) enact legislation implementing the provisions of the Streamlined Sales Tax Project (SSTP) or 2) implement minimum specifications outlined in the act, including the provision of free software for sellers, and pass legislation explicitly stating that the state will exercise its authority with regard to remote sellers.

The SSTP, launched by the National Governors Association, is a multi-state effort to simplify and align state sales tax policies. As of December 2014, 44 states and the District of Columbia had approved an interstate agreement that establishes uniform sales tax rules and definitions (of the 45 states that collect sales taxes), and 24 states had taken the next step of passing implementing legislation. Those 24 states are: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

Under the SSTP legislation, states and cities still have the authority to determine what goods are taxed at what rate, but must adhere to rules governing such things as how and when they can change tax rates, as well as uniform definitions (e.g., whether marshmallows are considered food or candy for tax purposes).

The Senate passed the Marketplace Fairness Act with an overwhelming, bipartisan vote of 69 to 27 on May 6, 2013. An identical bill was introduced in the House, but stalled when, even after a strong push in the fall of 2014, Speaker John Boehner refused to bring the bill to a vote before the end of the 113th Congress.

State Legislation

Click the map for more information.

The second strategy states are pursuing does not rely on Congressional action, but instead uses existing state authority to clarify what constituents “nexus” for the purposes of sales tax liability.  (Under the Supreme Court’s ruling, only retailers that have a physical presence, or nexus, in a state must collect sales tax on purchases made by that state’s residents.)

In the past, many national chains, despite having nexus in every state by virtue of their stores, claimed their e-commerce sites were distinct legal entities, unrelated to their bricks-and-mortar stores and therefore were exempt from collecting sales taxes. This practice is known as “entity isolation.”

State action in recent years has sharply curtailed the number of so-called “clicks-and-mortar” retailers using entity isolation to skirt collecting sales taxes on their online operations.  In 2001, California became the first state to issue an administrative ruling against the practice of entity isolation when its Board of Equalization ruled that was not a separate entity, but the online extension of the chain Borders Books & Music and therefore must collect sales taxes on sales to California residents.

In the following years, several states amended their sales tax laws to clarify that the e-commerce arms of national chains still have nexus and that entity isolation does not absolve them of their obligation to collect sales tax.  (Below we include policy examples from Arkansas and Indiana.)

Increasingly concerned about the threat of court action by states and the potential liability, as well as the complexity and inefficiency of attempting to treat the e-commerce side of their operations as a separate company, in 2003 most national chains cut a deal with the states in which they were forgiven all of their back taxes in exchange for collecting sales taxes online from that point forward.   Although most national chains now collect sales taxes on online orders, there remain a few that do not.

In 2008, New York became the first state to further extend the definition of nexus to cover some web-only retailers, including The legislature passed a bill, accompanying its budget, that said that web retailers have nexus in New York and must collect sales taxes if they have sales affiliates in the state that generate a combined total $10,000 a year or more in revenue for the retailer.   (Sales affiliates are individuals or organizations that are paid commission for linking to the online retailer’s web site. has thousands of sales affiliates nationwide, as do many other online retailers. In all, more than 30 companies are covered by New York’s provision.)

In March 2013, New York’s highest court, the Court of Appeals, upheld a lower court decision when it ruled that the state’s law does not violate the commerce or due process clauses of the U. S. Constitution. The case was brought by and, which argued that the state did not have the authority to require online retailers to collect sales tax based on the nexus provided their in-state sales affiliates.

In October 2013, the Illinois Supreme Court overturned a similar state law.  However, the Court did not find that the law violates the U.S. Constitution.  The narrow ruling instead found that the law was at odds with a temporary federal restriction on imposing new taxes on internet activity.  That restriction is set to expire in November 2014.

A number of other states (see map) have followed New York’s lead, adopting similar laws that require online retailers with sales affiliates based within their borders to collect sales tax (scroll down for details on each state). California’s law also extends the obligation to collect sales taxes to online retailers that have subsidiaries or affiliated companies in the state.  (Amazon has a technology division in California that developed the Kindle.  It maintains divisions in several other states where it currently does not collect sales tax, claiming that its e-commerce operations are a separate company.)

South Dakota and Colorado have also passed laws requiring online retailers to notify their customers that they owe the state’s use tax on purchases in which sales tax is not collected. Colorado’s law, which also requires out-of-state sellers to notify the state Department of Revenue, was upheld in February 2016 by a federal appeals court. The court wrote in its opinion:

“The plaintiffs haven’t come close to showing that the notice and reporting burdens Colorado places on out-of-state mail order and internet retailers compare unfavorably to the administrative burdens the state imposes on in-state brick-and-mortar retailers who must collect sales and use taxes. If anything, by asking us to strike down Colorado’s law, out-of-state mail order and internet retailers don’t seek comparable treatment to their in-state brick-and-mortar rivals, they seek more favorable treatment, a competitive advantage, a sort of judicially sponsored arbitrage opportunity or ‘tax shelter.'”

Inviting the U.S. Supreme Court to Revisit Its Decision

On May 1, 2016, a new state law took effect in South Dakota. The law requires merchants to collect the state’s sales taxes if their revenue from sales in South Dakota exceeds $100,000 per year, or if they process 200 or more separate transactions a year in the state.

The law contradicts Quill. But that’s the point. South Dakota is leading a charge of nearly two dozen states, as Governing reported in May 2016, undertaking a “coordinated effort” to land the issue of sales tax fairness back in the courts. South Dakota’s law has already drawn a lawsuit, as has a similar effort in Alabama.

South Dakota’s law directly addresses the legal question. “Given the urgent need for the Supreme Court of the United States to reconsider this doctrine,” it reads, “it is necessary for this state to pass this law clarifying its immediate intent to require collection of sales taxes by remote sellers, and permitting the most expeditious possible review of the constitutionality of this law.”



  • Check out this interactive map to see how much of your state’s budget gap could be eliminated by requiring online sellers to collect sales taxes.


Internet Sales Tax Fairness — Nevada

In May 2015, Nevada passed an internet sales tax fairness law with provisions modeled after New York's and Colorado's. The law creates a sales tax obligation if, as in New York's law, a retailer generates more than $10,000 in annual sales via in-state affiliates, or if, as in Colorado's law, a retailer is part of a group of business entities, of which one member has a physical presence in the state that is connected with the retailer.… Read More

Internet Sales Tax Fairness - Illinois

In Aug. 2014, Illinois passed a law that requires out-of-state sellers to collect and remit state sales taxes if they generate more than $10,000 in sales a year through sales affiliates based in Illinois. The law went into effect in Feb. 2015. It's a revised version of a 2011 state law that the state Supreme Court struck down, on grounds that it conflicted with the federal Internet Tax Freedom Act. To bring the law in line with federal law, on its second try, the Illinois legislature broadened the law to apply not only to Internet sellers, but also to catalog and mail-order retailers. … Read More

Internet Sales Tax Fairness – Rhode Island

In 2009, Rhode Island began requiring e-commerce retailers to collect and remit state sales taxes if they generate more than $5,000 in sales through in-state sales affiliates.… Read More

Internet Sales Tax Fairness - Notification - South Dakota

In early 2011, South Dakota enacted the following law, which requires out-of-state retailers to notify their South Dakota customers that they owe use taxes on their purchase.… Read More

Internet Sales Tax Fairness - Connecticut

Connecticut requires e-commerce retailers to collect and remit state sales taxes if they generates more than $2,000 in sales a year through sales affiliates based in the state. … Read More

Internet Sales Tax Fairness — Georgia

In March 2012, Georgia passed a provision (the relevant section begins on page 50) clarifying that remote retailers with in-state affiliates acting as sales agents must collect and remit sales taxes on purchases made by state residents. … Read More

Internet Sales Tax Fairness — Vermont

In 2011, Vermont passed a law requiring remote sellers to collect sales tax if they make more than $100,000 in sales a year through in-state sales affiliates (such as those used by Amazon). However, the law will not take effect until 15 other states have adopted similar laws. … Read More

Internet Sales Tax Fairness - North Carolina

In August 2009, North Carolina passed a measure requiring large e-commerce retailers to collect and remit state sales taxes if they generate more than $10,000 in sales a year through in-state sales affiliates. … Read More

Internet Sales Tax Fairness - Michigan

In January 2015, Michigan passed legislation that will require out-of-state sellers to collect state sales taxes if they use in-state sales affiliates or otherwise have a nexus to the state, and if 1) they generate more than $10,000 in annual in-state sales via those affiliates, and 2) they generate more than $50,000 in annual sales to Michigan residents. The law received bipartisan support, and was passed by the state's Republican-controlled legislature, and signed by Republican Gov. Rick Snyder. The law will take effect on October 1, 2015.… Read More

Internet Sales Tax Fairness — Pennsylvania

In December 2011, the Pennsylvania Department of Revenue issued a bulletin clarifying that state law requires an out-of-state retailer to collect sales tax if it has property stored or distributed through warehouses in the state (regardless of whether the retailer owns the warehouses) or if it uses affiliated sales agents to direct sales to its website. … Read More

Internet Sales Tax Fairness - Washington (Proposed)

In February of 2015, an e-fairness bill began working through the Washington state Legislature that goes beyond the online sales tax fairness measures that other states have taken. The bill seeks to define people or businesses as having a substantial nexus with the state, even if they are organized or incorporated outside of the state, if they have more than $50,000 property in the state, more than $50,000 of payroll in the state, more than $250,000 of receipts from the state, or 25 percent or more their total property, payroll, or receipts in the state.… Read More

Internet Sales Tax Fairness - Notification - Colorado

Colorado's notification law was repealed shortly after its enactment on the grounds that the state reporting requirement imposed an excessive burden on out-of-state sellers. Similar laws that require online retailers to notifying customers of their tax liability, but do not have a state reporting requirement, have been adopted in Oklahoma and South Dakota. … Read More

Internet Sales Tax Fairness - Arkansas

In March 2011, Arkansas passed a law (Act 1001) that requires large e-commerce retailers to collect and remit state sales taxes if they generate more than$10,000 in sales a year through in-state sales affiliates.

Read More

Internet Sales Tax Fairness - California

California's new sales tax fairness law, which was signed into law by the governor on June 29, 2011, has two parts.  The first is similar to laws enacted in half a dozen other states.  It requires online retailers that have more than $500,000 in annual revenue from California customers and that use in-state sales affiliates to collect sales taxes. A second provision of the law mandates that retailers that have subsidiaries or affiliated companies in California, as Amazon does, also must collect sales tax. … Read More

Internet Sales Tax Fairness - New York

In 2008, New York enacted a pioneering law that requires many large online retailers to begin collecting sales taxes on purchases shipped to the state, even if they have no operations or employees there. … Read More

Internet Sales Tax Fairness - State Purchasing Provision - North Carolina

North Carolina law requires the state to purchase goods and services only from companies that collect sales tax on all sales in the state. … Read More

Internet Sales Tax Fairness - State Purchasing Provision - South Dakota

South Dakota law requires the state to purchase goods and services only from companies that collect sales tax on all sales in the state. … Read More

Internet Sales Tax Fairness - South Dakota

In May 2016, a new type of sales tax fairness law took effect in South Dakota. The new law requires merchants to collect the state's sales taxes if their revenue from sales in South Dakota exceeds $100,000 per year, or if they process 200 or more separate transactions a year in the state. The law is part of an effort by states to challenge the existing sales tax fairness standard, and both put pressure on federal legislators and bring the issue back before the U.S. Supreme Court.… Read More

Internet Sales Tax Fairness - European Union

Unlike the United States, the European Union never considered making the internet a tax-free zone. To exempt internet sales from taxation, in the European view, would be to violate the principle of neutrality, as described in an OECD report on the "framework conditions" for electronic commerce.… Read More

Marketplace Fairness Act

The Marketplace Fairness Act of 2013 passed the Senate with an overwhelming, bipartisan vote.The bill would allow states that met certain conditions to require large internet and mail-order retailers to collect state and local sales taxes. As the bill's preamble states, its intended purpose is "to restore States' sovereign rights to enforce State and local sales and use tax laws."… Read More

Internet Sales Tax Fairness - Minnesota

In May 2013, the Minnesota state legislature passed, as part of an omnibus tax bill, legislation that will require out-of-state sellers to collect state sales taxes if they 1) use in-state sales affiliates and 2) make more than 100 sales to Minnesota residents or generate more than $100,000 in sales to Minnesota residents. The law will take effect on July 1, 2013.… Read More
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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance, and directs its Independent Business Initiative, which partners with a wide range of allies to implement policies that counter concentrated power and strengthen local economies.

2 Responses

  1. Bob Dyer

    Article I – Section 9 of the US Constitution states: “No Tax or Duty shall be laid on Articles exported from any State.” Based on that, unless the point of sale from which the goods are sold resides within the State the goods are being shipped, no tax or duty could be levied. The Supreme Court “Quill v. North Dakota” decision stretched the definition of “No Tax or Duty” just beyond the legal breaking point to satisfy State political pressure. Internet Sales Tax Fairness should fully respect the rule of law and the US Constitution before satisfying their greed. Sales tax collected on goods and services sold from businesses licensed to do business within the local governments’ jurisdiction should continue to be the extent of their reach.

  2. Stacy Mitchell


    I’m always surprised by people who write and express strong support for the idea that government should step in and favor one group of businesses over another by not requiring them to collect the same taxes. Our system was built on the idea of fairness, a concept deeply imbedded in the Constitution.

    In Quill, the Supreme Court said: “Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” That is, the Court found no fundamental Constitutional problem with Congress establishing a level playing field when it comes to sales tax collection. That is what we are advocating.