Can You Avoid E-Commerce Sales Tax?
Remember the good old days when you used to be able to avoid your state’s sale tax by purchasing stuff through over the Internet? What happened to that, and can you still do it?
Disclaimer: The following information does NOT constitute legal advice and is only for general educational purposes. Each situation is different and specific legal issues usually require additional research and investigation, so do not rely on this article to address a particular legal issue; use this as a starting point to gain a general understanding. This article, although educational in purpose and substance, nevertheless, might be deemed attorney advertising, and prior results do not guarantee future success.
A Brief History of Sales Tax
Ookay. I know this is very basic, but just remember “there are no dumb questions, just dumb people.” RELAX, I’m kidding. I didn’t know the history of this until I looked it up either. Geez, get a sense of humor - I know I try here.
Anyway, according to at least one source, state sales taxes took off during the Great Depression when many states found themselves in real peril of not being able to pay their bills. West Virginia or Kentucky may have been the first states to try this (around 1921 or so), and the idea spread across the country.
It was so successful, that from around 1970 to 1990, sales taxes became the largest source of revenue for most states until personal income tax surpassed it. As of January 2019, 45 states (out of 50 right?) have sales tax, Colorado being the lowest at 2.9%.
In 2016, state and local governments collected about $377B (billion not million) in sales taxes.
Quill Corp v. North Dakota (1992)
EBay and Amazon were founded in 1995, but even before then, people were selling things remotely over that new fangled thing called the Internet. Normal people found that they could avoid paying sales tax to the state they lived in by simply purchasing something over the Internet. The “old school” way of doing this was say, driving from New York to Pennsylvania to buy a car to avoid sales tax in New York.
Well, states being constantly hungry for new money, were not fooled by this ingenuity, so they passed laws requiring online retailers to cough up the cash or at least rat out the out-of-state purchasers. This issue, of course, found its way to the United State Supreme Court, which in Quill Corp v. North Dakota (1992) basically set the precedent that in order for a given state to force the online retailer to collect sales tax from the customer in the state, the online retailer had to have a “physical presence” in that state.
If you really want to dive into the legal mumbo jumbo of it all, it has to do with the Dormant Commerce Clause, in that the states cannot interfere with “interstate commerce” by burdening or discriminating against other state residents, etc. This stems from the Article I, Section 8 powers of the United States Constitution, which give Congress the power to regulate “commerce.” The Supreme Court basically said the online retailer needed a “substantial nexus” with the state in question, and that “substantial nexus” was a physical presence - UNLESS - Congress passed a law to the contrary, which it didn’t.
Anyway, that was the law of the land until 2018. Although there were some lively arguments about what was “a presence in the state” and state attempts to get around it.
South Dakota v. Wayfair (2018)
In 2018, the United States Supreme Court, heard a case that essentially forced a review of the Quill standard. Basically, the court said that while there still needs to be a “substantial nexus” between the online retailer and the state, “physical presence” is just a single means of determining this.
In other words, gross sales amount or the number of sales in a state, could create that “substantial nexus” which then permits a state to have a legitimate basis on which to tax the “sale” even though the point of purchase was out of state.
In plainer English, if I’m in New York, and I buy a T-shirt from your company in Alaska which has no sales tax, and that’s the only sale your company made to New York, then there’s an argument to be made that you, the online retailer, do not have to collect sales tax from me to turn over to the state of New York. Why? Your “commerce” with New York is “too remote” to qualify as a “substantial nexus” with the state, to give the state government authority over you.
Incidentally, New York can still require me to figure out the sales tax and turn it over to them (good luck with that guys) or possibly require (or at least ask) the online retailer in Alaska to tell the state government about that purchase so that they can come after me.
However, if you, in Alaska make 200 sales or more, or a $100,000 in sales, then many states regard that as enough of a “substantial nexus” to come after you directly to collect sales taxes. It’s not 100% clear yet if that’s legally sufficient for them to come after you.
Can you do online retail sales and not collect sales tax from the state where the customer lives? Ahh … I doubt it. It’s very dicey right now. There are going to be more legal challenges to come, but if you do any real business, chances are you’ll have to collect the sales tax I predict. Very small retailers with the occasional sale, maybe not.
If you’re the customer, chances are by law, technically you are on the hook for such taxes whether you know it or not, but it will be very unlikely the state will come after you directly without the assistance of the online retailer. Although I do remember when New York used to send investigators over to New Jersey and leave notes on the cars of folks with New York license plates, informing them that the tax authorities were watching them and expected them to voluntarily report their purchases in New Jersey and pay sales tax on them. CREEPY.
Anyway, happy shopping during this holiday season!