Sales Tax on Internet Sales – What’s Next?

On Monday, December 2 (ironically – “Cyber Monday”), the U.S. Supreme Court decided not to hear the sales tax case filed by  The Court’s decision allows New York to continue taxing internet sales made by retailers that do not have a business location or employees in the State, but do make internet sales resulting from referral agreements with in-state residents (known as “click through nexus”).  The decision will encourage states like Maine that have enacted similar laws, and may lead other states to follow suit.


In 1992, the U.S. Supreme Court, in Quill v. North Dakota, established a physical presence standard for states to impose a sales tax collection obligation on businesses making taxable sales within a state.  The Court also stated that Congress is in a better position and has the authority to regulate and provide uniformity in state tax collection requirements.  Since that decision, the way consumers purchase goods has changed dramatically.  Most of us now purchase at least some items over the internet, often from businesses such as, and eBay that may not have a physical presence in our state, and therefore do not charge sales tax on the purchases.  Although consumers are required to report use tax on taxable purchases upon which no sales tax was charged, most people do not do so.  States have great difficulty enforcing this rule.  The states’ lost sales tax revenue from internet sales is estimated to be more than $23 billion.  Just in Maine, the estimated lost sales tax revenue is in the tens of millions of dollars.

In 2008, the State of New York passed a law requiring the collection of sales taxes by internet retailers that had commission agreements with in-state residents under which the residents would refer potential customers to the retailers, typically through website links.  The State’s position was that retailer’s agreements with these affiliate marketers met the physical presence standard established by the U.S. Supreme Court in Quill.  Amazon challenged the law, which was upheld by the State’s lower court.  The lower court’s decision was subsequently upheld by the New York Court of Appeals, the State’s highest court.

After the New York lower-court’s decision, other states began passing similar laws.  In some instances, Amazon and other retailers that had affiliate marketing agreements with in-state residents severed those agreements.  Maine enacted its click-through nexus law effective October 9, 2013, and Amazon responded by ending its affiliate relationships with Maine residents.

The Marketplace Fairness Act

In an effort to address the sales tax collection issue, the Senate passed the Marketplace Fairness Act (MFA) on May 6, 2013.  If enacted, the law would authorize each member state of the Streamlined Sales Tax Agreement (the multi-state agreement for the administration and collection of sales and use taxes adopted in November 2002) to require internet retailers to collect sales taxes if specific requirements were met.  As written, the law would apply to internet retailers with remote sales (sales to states in which the retailer would not otherwise be required to collect sales tax) of more than $1 million.  A state that wanted to participate would need to meet minimum simplification requirements related to the administration of the tax, audits, and streamlined filing.  The bill is currently stalled in the House Judiciary Committee, and the likelihood of its passing without modifications is uncertain.

Many states support the MFA legislation, and supports the passage of legislation at the federal level – reasoning that compliance with the laws, collection and filing requirements of the 45 states that currently impose a sales tax, plus all of the local jurisdictions (there are more than 9,000 taxing jurisdictions in the U.S.) without some level of simplification and uniformity would be difficult and costly for even the largest businesses.

It will be very interesting to watch as this situation continues to develop.  The state tax revenue at stake is enormous.  The passage of federal legislation requiring internet retailers to collect sales taxes would impact many businesses of varying sizes.  There would be a cost in dollars and time to implement the processes (and software) that would be needed to comply with the new filing requirements.  Also, there are always unforeseen issues and complexities with any new law.  Brick and mortar retailers would welcome a change, as they see themselves as being at a competitive disadvantage by having to charge the tax when their out of state online competitors do not.

Stay tuned!

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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