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To Tax or Not to Tax Internet Retailers, that is the Question

Mallory Beberman's picture
Published: 02/05/17 - Country: United States


Since the dawn of the age of e-commerce, brick-and-mortar retailers have championed “the level playing field”. Their battle cry: Internet retailers should be subject to sales tax just like us!

This disparity is largely the result of a 1992 US Supreme Court decision, Quill Corp. v. North Dakota, in which SCOTUS found that a business whose only connection with a state is through a common carrier or the mail lacks the “sufficient nexus” under the Commerce Clause necessary to subject that business to the state’s use tax. Quill was subsequently applied to online retailers to mean that a state could not impose sales tax on an out-of-state business if that business did not have a physical presence in the taxing state (i.e., no warehouse, store, office or sales rep located there).  For decades, this finding has allowed online retailers to maintain a market advantage over traditional in-state brick-and-mortar retailers and has cost state and local governments millions in lost tax revenue. Many states require their residents who purchase goods over the Internet without paying sales tax to declare the tax when filing their year-end tax returns; however, few taxpayers do, and states have difficulty enforcing the requirement.

Several attempts to obligate online retailers to collect sales tax have been unsuccessful in Congress. States have had varying results. In 2008, New York passed the “Amazon Law” which requires out-of-state, online retailers to collect sales tax from New York customers if (i) that retailer has a click-through arrangement with an individual vendor located in New York, (ii) the out-of-state, online retailer receives a commission for such referrals to individual vendors, and (iii) the out-of-state, online retailer’s gross receipts from its sales to New York customers exceeded $10,000 during the preceding 12 months. A click-through arrangement allows a third party (in this case, the out-of-state, online retailer) to display a link on its website enabling consumers to click through to an individual vendor’s website (in this case, an individual vendor located in New York). The click-through arrangement allowed New York to establish a substantial nexus between the out-of-state, online retailer and New York because the individual vendor(s) was physically located in New York.

Massachusetts followed suit a few years later in 2013 when it began collecting its 6.25% state sales tax on purchases from Amazon. The physical presence requirement was met because Amazon had an office in Cambridge and a technology firm located in North Reading.

As of April 1, 2017, Amazon now collects sales tax from all 45 states that have a statewide sales tax. Other Internet retailers, however, still do not collect sales tax from their buyers.

Earlier this year, New York Governor Andrew Cuomo proposed that New York change its tax rules to collect sales tax not only from vendors located inside the state, but also those located outside of it. His proposal, which would likely have been subject to litigation, would have required online marketplaces with more than $100 million in annual sales to collect sales tax on behalf of individual vendors located outside of New York who sell goods to New York state residents. Governor Cuomo predicted his proposal could generate about $200 million in sales tax over the next two years.

Luckily for companies like Etsy and eBay, to name a few, Governor Cuomo’s proposal was not included in the New York state budget deal for fiscal year 2017-18. For the time being, at least, the status quo in New York will remain unchanged.

But politicians in New York are not the only ones attempting to find ways around Quill. The Massachusetts Department of Revenue recently directed out-of-state vendors to collect sales tax on Massachusetts purchases beginning on July 1, 2017, arguing, among other things, that the software applications that sellers put on customers’ computers and smartphones constitute a physical presence in the Commonwealth. This directive, which can be implemented without legislative approval, will impact out-of-state Internet retailers that sell more than $500,000 of goods annually but will exclude those with fewer than 100 transactions per year. Massachusetts Governor Charlie Baker expects the directive to raise $30 million for the next fiscal year. Tax experts and opponents of the initiative predict that Governor Baker’s directive will be challenged in court.

The jury is still out as to whether these attempts (and others like them in Arkansas, Georgia, Mississippi, Utah and New Mexico) to increase the number of Internet retailers required to collect sales tax will survive the scrutiny they will undoubtedly face from tech titans and lobbyists.  But it seems clear that those in favor of collecting sales tax from online retailers will continue to charge ahead, despite setbacks.

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Mallory Beberman's picture

An Associate in the firm's Real Estate group, Mallory Beberman focuses her practice on representing borrowers and lenders in complex commercial real estate mortgage, mezzanine and construction financings.

Mallory counsels purchasers and sellers in the acquisition and disposition of real estate assets, including for condominium and cooperative properties, as well as developers in the acquisition of development rights and land assemblage parcels. She also represents landlords and tenants in commercial leasing transactions, including the drafting and negotiating of commercial leases, lease amendments and subleases.

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Economic Sectors


Commercial real estate transactions (retail, office, industrial and mixed-use) that involve properties located in New York City and throughout the country, including acquisitions and dispositions (one-off and portfolio transactions), commercial development, leasing and finance are the foundation of David Rabinowitz's extensive experience. David also focuses on representing non-U.S. retailers in connection with their expansion into the U.S. Chambers USA reports that David is New York retail's "key contact." David, a Director in our Real Estate group, brings thirty years of experience to his practice and clients.