The NCSL Blog


By Mark Wolf

When the notion that Congress needed to enact legislation to allow states to collect sales tax on purchases made online, LeBron James was widely acknowledged as the best (high school freshman) basketball player in the world.

Max Behlke and Maureen RiehlIt was 1999 and the world was fretting about Y2K cyber mischief. Few people appreciated that the then-trickle of lost sales tax revenue to states would eventually become a tsunami of an estimated $26 billion in uncollected remote sales taxes.

"If your largest revenue stream isn't growing, it's going down," Max Behlke, NCSL's director of budget and tax policy, told a session at NCSL's Capitol Forum, noting that sales tax accounts for 34 percent of total state revenue.

For the second consecutive year, more people shopped online on Black Friday than in brick-and-mortar stores and online sales have grown annually by 15 percent the past five years.

The federal momentum for online sales tax legislation, however, remains stalled. The Marketplace Fairness Act passed the Senate 69-27 in May 2013, but similar bills have not even received hearings.

Had Congress acted earlier, businesses would have been better off, said Maureen Riehl, principal and counsel, MultiState Associates Inc.

"It shows you the frustration of 19 years of no progress," she said. "Previous bills were very friendly to business."

States have become frustrated waiting for federal action, said Behlke, noting that NCSL is getting increased inquiries from states about what kind of legislation they can enact.

In 2017 alone, 34 states introduced remote sales tax legislation and notable legislation was enacted in states including Alabama, Indiana, Minnesota, North Dakota, Rhode Island, Virginia, Wyoming and Washington.

"The patchwork that we've always been concerned about is happening now," said Riehl. "If you're a business community person you should be very concerned about this patchwork approach."

Washington state's law, said Behlke, "is the one to watch." The law has a low threshold ($10,000) and directly affects third-party (marketplace) sellers who sell goods on Amazon's platform, many of which have gone untaxed. "Last month, Amazon said it was going to collect taxes on its entire platform in Washington."

All eyes in the online tax world are currently focused on the U.S. Supreme Court, which may take up Mayfair vs. South Dakota within the first couple of weeks of 2018. As Lisa Soronen, executive director of the State and Local Legal Center, explained during another Forum session, the Supreme Court ruled in Quill vs. North Dakota in 1992 that states can’t force out of state retailers to collect sales tax. (Just to set the historical context, in this case the sales object in question was floppy discs). 

In 2015, Justice Anthony Kennedy wrote a concurring opinion in Direct Marketing Association vs. Brohl, that said the court was wrong in Quill, times have changed and the legal system should bring us a case to overturn Quill. The money quote: "Quill now harms states to a degree far greater than could have been anticipated earlier."

Furthermore, Soronen added, shortly before joining the Supreme Court, Judge Neal Gorsuch wrote a concurring opinion strongly suggesting he thinks Quill should be overturned.

South Dakota then passed "the most unique piece of legislation I've ever seen enacted," said Behlke. By challenging Quill, the state expected to (and did) lose every court challenge, which sets up a potential Supreme Court review.

Soronen said conventional wisdom is that if the court takes the case, it will probably overturn Quill, but cautioned that the court doesn't like to overturn cases.

"If they don't take it up, states are going to say, 'Let's give them some more cases'," Behlke said, adding that he didn't believe the court will take it up and then rule against it.

"If South Dakota loses, it's pretty horrible for every state that has a sales tax," he said.

(FYI, since 1999, LeBron James has won three Ohio state championships, three NBA championships, four NBA Most Valuable Player awards, two Olympic gold medals and been selected 13 times to the all-NBA team. On remote sales tax legislation, Congress is still lacing up its sneakers.)

Mark Wolf is editor of the NCSL Blog.

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This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.