Sign In
    Wisconsin Lawyer
    October 01, 2015

    Changes on the Horizon: Sales and Use Tax in the E-Commerce Era

    The Internet marketplace has changed the retail landscape, and many believe the time has come to update the sales tax treatment of e-commerce transactions crossing state lines.

    Andrew Pascaly

    forest at nightSales taxes and remote sales have been a hot topic for the U.S. Supreme Court, state taxing authorities, and Congress in 2015. The underlying issue is that a retailer selling taxable items across state lines can avoid sales tax, while the same goods or services sold in-state would incur the tax.

    The Internet era has fueled the dispute between brick-and-mortar retailers and e-commerce retailers as a result of the instant access to out-of-state customers in today’s online marketplace. On one hand, brick-and-mortar retailers effectively have to charge more compared to their out-of-state e-commerce counterparts that do not have to collect sales tax. On the other hand, each state has a different tax code and even counties within a state often vary in taxing practices, such that e-commerce retailers might have a hard time understanding and complying with an estimated 7,500 or more taxing jurisdictions nationwide. Meanwhile, state governments believe they are missing out on a significant revenue source.

    This article presents an overview of sales and use taxation, the current sales and use tax treatment of e-commerce transactions across state lines, and potential sales and use tax legislation and judicial action related to e-commerce retailers. While many of the concepts in this article apply to all retailers selling across state lines, the discussion focuses on e-commerce retailers.

    Overview of Sales and Use Taxation

    The sales tax and use tax work together as complementary taxes. In general, the sales tax applies to a sale, license, lease, or rental of taxable goods or services, while the use tax applies to the use, consumption, or storage of taxable goods or services.1 Viewed from another perspective, the use tax operates to fill the gap where the sales tax would not otherwise apply. If an e-commerce retailer is not obligated to collect sales tax on the sale of a taxable product or service (because of constitutional limits discussed below), then the consumer is subject to the use tax on that same transaction. In theory, this results in a system in which tax is paid on every taxable transaction, whether the retailer sells to a consumer in-state or across state lines. However, state taxing authorities rarely possess the resources to monitor and pursue use tax imposed on individual consumers, so as a practical matter the use tax often goes uncollected, except against the most honest consumers.

    Current Treatment of Interstate E-commerce Sales

    If a sale of taxable goods or services is made by an e-commerce retailer located in a given state to a consumer in the same state, the situation is simple. For example, a Wisconsin e-commerce retailer selling to a Wisconsin consumer must collect sales tax because the sale is made “at retail” and “in Wisconsin.”

    The larger issue is how to treat a transaction in which an e-commerce retailer located in one state (the “origin state”) sells to a consumer across state lines (the “destination state”). As a general rule, state tax codes favor the destination state’s ability to tax the transaction rather than the origin state, because the tax should follow consumption. But, the Commerce Clause of the U.S. Constitution prohibits the destination state from imposing sales tax on the interstate sale in many instances.

    The solution, the use tax, is an imperfect system due to the administrative burdens identified above. The ideal approach from the states’ perspective is for the destination state to impose a use tax collection obligation on the out-of-state e-commerce retailer, such that the retailer acts as the tax collector on behalf of the destination state.

    If the flurry of Supreme Court, state, and congressional activity leads to changes in e-commerce taxation, all commerce crossing state lines may be affected, and state governments stand to receive a large revenue boost.

    However, there are limitations on this practice. First, the destination state’s use tax must reach the sale. Second, the collection obligation must not violate the state or federal constitution. The constitutional element has historically been a substantial bar to tax collection on sales made across state lines and has arguably resulted in a “tax holiday” to many e-commerce retailers.

    Regarding the first element, each state’s tax code specifies the scope of the use tax. An often-used approach is to subject a retailer to a use tax collection obligation when the retailer is “engaged in business” in the state or “doing business” in the state. The definition of each phrase ordinarily includes a list of the activities that will bring the retailer within the scope of the law. The second element, constitutional boundaries, looks to case law from the U.S. Supreme Court.

    The flagship case is Quill Corp. v. North Dakota.2 In Quill, North Dakota’s taxing authority required an out-of-state mail-order retailer without a physical location or sales representatives in North Dakota (the destination state) to collect and pay use tax on behalf of the North Dakota consumers.3 The Supreme Court ruled in favor of Quill Corporation and held that the Commerce Clause prevents imposition of a use tax collection obligation on an out-of-state retailer that lacks a physical presence in the destination state.4 Stated in a technical fashion, a retailer located out of state and without a physical presence in the destination state does not possess “substantial nexus” in the destination state, and the destination state cannot impose a use tax collection obligation on that retailer.

    However, the Court clarified in its opinion that Congress may determine “whether, when, and to what extent” the states may require retailers located out of state to collect sales or use taxes on behalf of the destination state.5 Congress has yet to pass such legislation, although current proposals are discussed below.

    Quill’s Continuing Impact

    The Quill decision continues to govern the e-commerce industry despite vast changes in the landscape of interstate commerce, from the mail-order businesses of the early 1990s to the Internet and e-commerce era of the 2000s and beyond. Quill and its related line of cases provide certain rules, or at least guidelines, for e-commerce retailers to follow.

    Andy PascalyAndy Pascaly, U.W. 2013, works at Epic Systems Corp., focusing primarily on federal and state tax issues. He also has experience in public accounting and private practice. Thanks to Ron Todd and Stroud, Willink & Howard LLC for their contributions to this article.

    Some general examples of state provisions that have been deemed to constitute physical presence or substantial nexus include the following: 1) “feet on the ground” via agents in the destination state; 2) regular delivery to the destination state through private channels; 3) maintaining a warehouse or distribution center in the destination state; 4) regular and systematic advertising or solicitation of orders through media or services in the destination state; 5) owning or leasing tangible personal property or real property physically located within the destination state; and 6) contracting with a franchisee or licensee operating under the seller’s name within the destination state.6

    If an e-commerce retailer has these or other activities deemed to constitute physical presence in the destination state, it is subject to that state’s tax code. Conversely, Quill and its line of cases definitively established that deliveries crossing state lines through a common carrier are not enough to establish physical presence or substantial nexus in the destination state. 

    Many consumers and business owners are aware that e-commerce retail giant now collects tax on behalf of consumers in certain states based on either 1) voluntary physical presence in the destination state obtained through warehouses or distribution centers, or 2) targeted laws establishing a physical presence in the destination state through affiliate sellers or referral partners, known as “click-through nexus.” For instance, the distribution center in Kenosha, Wis., triggers a sales tax collection obligation for Amazon on taxable sales made to Wisconsin consumers.

    However, taxation of Amazon and taxation of the e-commerce industry in general are not tied together, and physical presence in the destination state remains the threshold for imposing a tax collection obligation on interstate sales. In fact, it is commonly believed that Amazon supports legislation to impose a tax collection obligation on all e-commerce retailers to even the playing field against its smaller e-commerce competitors that do not have distribution centers, affiliate sellers, or other physical presence outside their home states. 

    Call for Judicial Interpretation

    On March 3, 2015, the U.S. Supreme Court issued a decision in Direct Marketing Association v. Brohl that might signal potential changes to the sales and use tax treatment of e-commerce retailers under the U.S. Constitution.7Direct Marketing stems from a Colorado law that imposes a reporting obligation on e-commerce retailers selling to Colorado residents if the retailers are not collecting sales or use tax on Colorado’s behalf.8 In other words, Colorado’s law addresses the state taxing authority’s practical inability to monitor and pursue use tax payments from the individual consumers. Specifically, Colorado forces the e-commerce retailer to give the taxing authority a hand by telling it where to look.

    In Direct Marketing, the Supreme Court did not assess the merits of Colorado’s law in terms of the Commerce Clause, Quill, or otherwise. Instead, the Supreme Court decided whether the federal court system was an appropriate venue to hear the dispute, and determined that it was. In a concurring opinion, though, Justice Kennedy took the opportunity to offer his thoughts on the fundamental question of whether e-commerce retailers should be required to collect sales and use tax on sales made across state lines. 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.”9

    Justice Kennedy argued … that a new interpretation of substantial nexus may be necessary for e-commerce retailers, and that physical presence might not be the appropriate measure.

    Essentially, Justice Kennedy argued that the evolution of the Internet and the landscape of selling has changed so significantly since 1992 (the year Quill was decided) that a new interpretation of substantial nexus may be necessary for e-commerce retailers, and that physical presence might not be the appropriate measure. Justice Kennedy emphasized that the stakes are high, noting that California has estimated its use tax collection rate of interstate sales made to California consumers at only 4 percent of what is due, and that Colorado estimated its lost revenue at $170 million in 2012.10 The Wisconsin Department of Revenue estimates that in 2015, it will miss out on $88.8 million in uncollected taxes from Internet sales by out-of-state retailers selling to Wisconsin consumers.11

    Justice Kennedy’s concurring opinion in Direct Marketing signals a willingness by at least one U.S. Supreme Court justice to take on the issue that many people believe was incorrectly decided in Quill and that has inflicted increasing unfairness on brick-and-mortar stores and state governments in the e-commerce era.

    With the procedural matter resolved, the U.S. Court of Appeals for the 10th Circuit ordered briefing on the Commerce Clause issue in Direct Marketing. This is a crucial case to watch, because it may serve as the definitive authority for all e-commerce retailers unless and until the Supreme Court takes on the merits of the case. If that occurs, it could be a monumental decision in the e-commerce industry for years to come.

    Proposed Federal Legislation

    As Direct Marketing is working its way through the federal courts, the states and Congress have been at work. Almost half the states, including Wisconsin, have adopted the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA aims to simplify state tax codes to achieve uniformity in sales and use taxation, specifically with regard to 1) state administration, 2) tax base, 3) definitions, 4) tax rates, and 5) sourcing rules.12 Uniformity in sourcing rules relates to which state is entitled to tax a transaction that crosses state lines. Under the SSUTA, the destination state generally prevails over the origin state, consistent with the generally accepted principle that the tax should follow consumption. The SSUTA’s broader goal is to allow Congress to adopt a law imposing tax-collection obligations on retailers for sales that cross state lines, so that such a law could be consistently and easily applied.

    In March 2015, the Marketplace Fairness Act of 2015 (MFA) was introduced in the U.S. Senate. The MFA would allow the destination state to impose a sales and use tax collection obligation on retailers with more than $1 million of annual gross receipts from remote sales.13 Later, the House of Representatives introduced the Remote Transactions Parity Act of 2015 (RTPA), which has similar provisions but an initial $10 million annual gross receipts threshold before phasing out to $1 million after three years.14

    The SSUTA’s broader goal is to allow Congress to adopt a law imposing tax-collection obligations on retailers for sales that cross state lines, so that such a law could be consistently and easily applied.

    The MFA and the RTPA would authorize SSUTA states to impose a tax collection obligation, while non-SSUTA states may only impose a collection obligation if the state’s tax code complies with the “minimum simplification requirements” included in each proposed law. The minimum simplification requirements are consistent with the SSUTA and mandate 1) a single collection and audit agency in the state, 2) providing software free of charge to help retailers calculate sales and use taxes and file sales and use tax returns in the state, and 3) sourcing remote sales in accordance with the SSUTA to prevent conflict and double taxation among the states. The minimum simplification requirements are in place to address e-commerce retailers’ concerns of being subject to a multitude of state taxing rules. Further, the annual-gross-receipts thresholds completely exempt smaller e-commerce retailers from the MFA and the RTPA.

    Despite the minimum simplification requirements, a prudent remote seller may wish to fully understand and assess its collection responsibilities nationwide, which will inevitably result in an up-front and continuing time commitment and expense in resources, personnel, or education. An unintended consequence of the legislation could also be additional states adopting the SSUTA. The additional members would be a benefit from a sales and use tax uniformity standpoint, but more voices, perspectives, and objectives may bog down decisions on other controversial state tax issues going forward.


    Congress and the Supreme Court may choose to remain quiet and continue the status quo in this area, just as they have done in the many years since Quill. But if the flurry of Supreme Court, state, and congressional activity leads to changes in e-commerce taxation, all commerce crossing state lines may be affected, and state governments stand to receive a large revenue boost.

    The e-commerce industry will not fold due to the addition of a small excise tax, particularly one that consumers are already familiar and comfortable with. Nonetheless, throughout this period of potential change the burden will be on e-commerce retailers and their counsel to understand their tax obligations and assess the resulting effect on pricing models, market entry, and other strategic decisions. In the end, developments in 2015 could have a lasting effect on the e-commerce industry.


    1 For Wisconsin’s sales tax, see Wis. Stat. section 77.52 (2013-14); for Wisconsin’s use tax, see Wis. Stat. section 77.53 (2013-14).

    2 Quill Corp. v. North Dakota, 504 U.S. 298, 305 (1992).

    3 Id. at 302-03.

    4 Id. at 317-18.

    5 Id. at 318.

    6 2 Jerome R. Hellerstein & Walter Hellerstein, State Taxation ¶ 12.02 (3d ed. 2012).

    7 Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1128 (2015).

    8 Id. at 1127-28.

    9 Id. at 1135.

    10 Id.

    11 Wisconsin Department of Revenue,

    12 Streamlined Sales Tax Governing Board Inc.,

    13 Marketplace Fairness Act of 2015, S. 698, 114th Congress (2015).

    14 Remote Transactions Parity Act of 2014, H.R. 2775, 114th Congress (2015).

Join the conversation! Log in to comment.

News & Pubs Search

Format: MM/DD/YYYY