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States Pressing Out-of-State Retailers to Collect Sales Tax

States and localities lose up to $23 billion in revenue a year in sales taxes that are legally due on interstate sales but that online retailers and other “remote sellers” do not collect.  That hurts local retailers, too, since they have to collect sales taxes but their online competitors don’t.

Fortunately, the past week has seen two significant developments in states’ fight to force remote sellers to collect and remit sales taxes.

First, on January 27, the Tennessee Court of Appeals ruled that Scholastic Book Clubs must collect sales taxes on book sales in which teachers distribute the company’s marketing materials to students, collect the money, and distribute the books.  Tennessee is the sixth state to sue the company and the third to win.

Of course, the way Scholastic sells its products is not typical of most remote sellers.  The decision, however, reinforces the principle that a remote seller’s use of people within a given state to help make sales can obligate the company to charge sales tax in that state.

This legal principle is at the heart of much more far-reaching legislation — which New York and seven other states have enacted and several other states are considering — that requires remote sellers to charge sales tax when they hire independent websites in a state to solicit customers on their behalf.  Amazon has challenged the New York law.  Should the case reach the state’s top court or the U.S. Supreme Court, the Tennessee Scholastic decision will bolster New York’s argument.

Second, and perhaps more importantly, Arizona has handed Amazon a bill for $53 million in back taxes for its failure to charge sales tax to customers there, the Seattle Times reported today.  Amazon has warehouses in Arizona but claims that, because an Amazon subsidiary owns them, it doesn’t have to charge sales tax there.  (In the 1992 Quill decision, the U.S. Supreme Court held that a state can require a remote seller to charge sales tax only if the seller has a “physical presence” in the state.)  Arizona apparently is dismissing Amazon’s argument — as did Texas, which imposed a similar $269 million assessment on Amazon last year.  Amazon says that it is challenging the Arizona and Texas charges.

Clearly, states are trying to chip away at the costly problem of untaxed remote sales using their current legal authority.  Bipartisan legislation now before Congress is the only really comprehensive way to solve the problem, but these state actions move the ball forward and pressure Congress to act.