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U.S. Supreme Court Justice Weighs In on E-Commerce and Sales Tax

March 6, 2015

Many e-commerce retailers continue to elude an obligation to collect sales and use tax on out-of-state sales, but following the March 3, 2015 U.S. Supreme Court decision in Direct Marketing Association v. Brohl, we can add Justice Anthony Kennedy to the list of parties lobbying for a change. As a brief history, in 1992 the Supreme Court held that a state’s taxing authority cannot reach across state lines to require a retailer to collect sales and use tax on the state’s behalf unless that retailer has “substantial nexus” in the state.  In general terms, substantial nexus requires some form of physical presence.  Nearly 25 years later, the same rule allows e-commerce retailers to sell across state lines without collecting sales and use tax from the customer.  While customers still have an obligation to pay use tax following the consumption of taxable goods and services purchased from an out-of-state retailer, from a practical standpoint a vast majority of the use tax liability goes uncollected because states do not have the resources to actively monitor each individual sale.  To make things easier, states desperately want to impose an obligation on the out-of-state e-commerce retailer to reach the untaxed portion of the online sales industry estimated at over $3 trillion annually.  While e-commerce giant Amazon.com now collects sales and use tax in 24 states, such treatment results from (i) voluntary physical presence in a state due to distribution centers or warehouses (which exists in Wisconsin), and (ii) states modifying their sales and use tax provisions to establish substantial nexus through Amazon’s affiliate sellers or “click-through” referrals.  Other e-commerce retailers without a similar connection to a state remain untouchable when it comes to sales and use tax collection responsibilities on out-of-state sales. The recent Direct Marketing decision is a procedural ruling that allows a federal court to determine the constitutionality of imposing a reporting obligation on an out-of-state e-commerce retailer.  In fact, the Court’s decision has no direct impact on the current state of the law discussed above.  However, in a concurring opinion, Justice Kennedy took the opportunity to offer his thoughts on the more fundamental question of whether e-commerce retailers should be required to collect sales and use tax on out-of-state sales.  Justice Kennedy framed the argument as follows:

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions.  Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers.  A connection to a shopper’s favorite store is a click away – regardless of how close or far the nearest storefront.  Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops.  As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.

In other words, Justice Kennedy argues that the evolution of the Internet and the landscape of remote selling has changed so significantly since 1992 that a modified interpretation of substantial nexus may be necessary with regard to e-commerce retailers.  It is important to remember that no law change results from Justice Kennedy’s statement.  But, amid continued discussions in Congress for e-commerce legislation, Justice Kennedy’s collateral support is worthy of tracking.  Stay tuned throughout 2015 to see if these efforts result in new legislation or a modification of current judicial interpretation surrounding e-commerce retailers.


If you have any questions about how the information in this article may affect you or your business, please call (608) 257‑2281 or contact your Stroud attorney.                  

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.