Printable versionSend by emailPDF version
August 19, 2014

2014-Issue 33—Over the last 15 years, e-commerce has become an increasingly important part of the U.S. economy. According to the U.S. Census Bureau, e-commerce accounted for $5 billion in the fourth quarter of 1999, which represented less than one percent of total retail sales, while 10 years later that number had grown to $38 billion, or four percent. Today, e-commerce sales for the first quarter of 2014 accounted for $71 billion or six percent of total retail sales in the United States. While it’s almost impossible to determine the amount of sales tax that goes uncollected on e-commerce sales by remote sellers, no one would argue that it’s a small or insignificant number. For this reason, states continue to pass new, creative and sometimes aggressive laws in an attempt to require remote sellers to collect at least some of this evasive sales tax on e-commerce sales.

Since Quill, businesses have had a sales tax collection and reporting requirement if they had a “physical presence” in the state. Physical presence is generally established by owning or leasing offices, property, plants or other facilities; operating a retail store; maintaining inventory in the state; delivering merchandise through company-owned vehicles; or maintaining employees in the state. However, with the development of technology, many businesses have been marketing their products electronically across many states without having any physical presence in any of them. As Quill requires physical presence, states that impose a sales tax have missed out on large amounts of tax from these remote sales that would otherwise have been collected if the sales had been made at a traditional brick-and-mortar store.

In response to Quill and the evolution of e-commerce, several states organized the Streamlined Sales Tax Project (SSTP). The SSTP was essentially formed to simplify multistate sales tax collection systems and build support for federal legislation that would eventually allow states to require out-of-state vendors to collect sales tax. Today, 24 member and associate member states form the SSTP. In addition, more than one thousand businesses have voluntarily registered as streamlined sales tax sellers through the SSTP’s central registration system. However, several of the most populous states (e.g., California, Florida, New York, Illinois, Pennsylvania and Texas) have not adopted the SSTP. Nevertheless, the SSTP has made a fair amount of progress in simplifying sales tax collection systems among its member states, and that, in turn, has paved the way for possible federal legislation that would allow eligible states to require remote sellers to collect the elusive sales tax on sales to customers in those states.

Marketplace Fairness Act
The Marketplace Fairness Act (MFA) was introduced on April 16, 2013 to regulate sales tax collection requirements on out-of-state businesses. The MFA would permit states to require remote retailers to collect sales tax, provided the remote sellers have at least $1 million of remote sales. The remote seller would be required to collect tax even if it did not have physical nexus as required by Quill.However, the MFA would require states to simplify existing sales tax laws in order to have jurisdiction over remote sellers. The simplification may include adopting the Streamlined Sales and Use Tax Agreement or meeting five simplification mandates:

  1. Notify retailers in advance of rate changes within the state;
  2. Designate a single state organization to handle sales tax registrations, filings and audits;
  3. Establish a uniform sales tax base for use throughout the state;
  4. Use destination sourcing to determine sales tax rates for out-of-state purchases; and
  5. Provide software or services for managing sales tax compliance and hold the remote seller harmless for errors resulting from relying on state-provided systems and data.

The MFA was passed by the Senate on May 6, 2013 but, by most accounts, has almost no chance of being passed by the House. Nevertheless, if passed, the MFA would require all remote sellers (e.g., e-retailers, catalog sales, phone orders) with more than $1 million of remote sales to begin collecting sales tax in the 23 SSTP member states and any state that had met the five simplification mandates noted above. These new rules would require businesses with more than $1 million of sales to customers in states where the business does not collect sales tax to implement new procedures within their tax departments to evaluate any new filing requirements and the tax treatment of their sales in states where they had not previously filed and, in some cases, to collect and remit sales tax.

On July 15, the House passed legislation called the Permanent Internet Tax Freedom Act (PITFA) that prevents multiple or discriminatory taxes on Internet access. PITFA, which has bipartisan support in both the House and the Senate, was introduced to replace the current Internet Tax Freedom Act (ITFA), which is set to expire on November 1. However, the Senate is currently working to extend the expiration of ITFA for two months while setting the groundwork to combine the MFA and PITFA under one bill called the Marketplace and Internet Tax Fairness Act (MITFA) in the fall.

Alternatives to the MFA
If the MFA or MITFA is not passed by the House, Congress may consider other possible solutions. On March 12, 2014, the Judiciary Committee of the House held hearings on the MFA and possible alternatives for sales tax reform. A number of alternatives were discussed:

  1. Sourcing and imposing tax in the state where the product is shipped from;
  2. Sourcing and imposing tax in the state where the product is shipped from unless it is shipped to a state that has joined a compact, in which case the tax is sent to that state;
  3. Giving states the ability to prohibit sellers from transacting business in their state if they do not collect sales tax; and
  4. Imposing notice and reporting requirements on remote sellers that would allow states to enforce current use tax laws.

Perhaps the most attractive and realistic alternative discussed was the imposition of reporting requirements on remote sellers. This alternative is appealing because it would give states a more effective mechanism to enforce current use tax laws without subjecting remote sellers to burdensome sales tax collection and filing requirements in countless jurisdictions.

Colorado has had a notice and reporting requirement for remote sellers since 2010. Specifically, Colorado’s law requires remote sellers, which are not obligated to collect sales tax from Colorado purchasers, to notify purchasers of their obligation to pay Colorado use tax, provide those customers with an annual report of purchases made and provide the state with the Colorado purchaser’s name, billing address and amount of purchases made. However, the Colorado Department of Revenue has not been able to enforce the notice and reporting requirements because of injunctions handed down first by the U.S. District Court and then by the Denver District Court, on the grounds that the law was unconstitutional and placed an undue burden on interstate commerce. On July 1, the U.S. Supreme Court decided that it would review the decision of the U.S. District Court of Appeals that reversed the injunction issued by the U.S. District Court. It should be noted that the reversal by the U.S. District Court of Appeals was based on a jurisdictional question and therefore the U.S. Supreme Court will likely not address the constitutionality of Colorado’s notice and reporting requirements. Nevertheless, Colorado is still barred from enforcing its reporting requirements on remote sellers until the preliminary injunction issued by the Denver District Court on February 18, 2014 is lifted.

Even though the proverbial jury is still out on the constitutionality of Colorado’s reporting requirements, there is no doubt that Congress can settle this issue for remote sellers and state revenue departments by authorizing states to create a reasonable system for remote sellers to report information that will help states enforce their use tax laws. While use tax is generally imposed on an end-user when sales tax is not collected by the vendor, many individuals purchase merchandise from remote sellers that do not collect sales tax and then do not remit use tax. Notice and reporting requirements do not impose any new taxes and do not require remote sellers to collect tax. Instead, notice and reporting requirements would enable states to enforce existing use tax laws.

Many businesses complain that reporting requirement would require new compliance and reporting procedures in states where the business does not have any “physical presence.” For this reason, any reporting requirements should have a minimum filing threshold, based on sales to customers in the state, before remote sellers are required to report customer information to a particular state. The threshold would prevent the reporting requirement from becoming unduly burdensome on smaller businesses and would ensure that the requirement is imposed only on remote sellers that purposefully and actively solicit and exploit the state’s marketplace.

If the MFA is not passed and Congress does not pursue other means of governing sales tax and nexus, then states will have no choice but to follow the lead of New York in enacting “click-through” nexus laws. New York’s click-through nexus was passed on June 1, 2008. The New York law creates a rebuttable presumption of nexus for remote sellers that enter into an agreement with a New York resident to refer customers for a commission (e.g., generally via a link on the resident’s website). New York’s rebuttable presumption of nexus is triggered when referrals from in-state residents result in at least $10,000 of sales within the state. The New York Court of Appeals upheld the law as facially constitutional. See, LLC v. New York State Department of Taxation and Finance, 20 N.Y. 3d 586 (N.Y. 2013). On December 2, 2013, the U.S. Supreme Court decided it would not review the case and, therefore, the New York law remains undisturbed. With the success of New York’s click-through law, it is no surprise that 14 other states have enacted similar laws, albeit not all successfully.

One of those states, Illinois, enacted a click-through nexus law on July 1, 2011, which imposes a sales tax collection obligation on remote sellers that have at least $10,000 of sales through a clickable link. Remarkably, however, the Illinois law did not require sales tax collection when an out-of-state retailer marketed through print or over-the-air broadcasting. In Performance Marketing Ass’n v. Hamer, the Illinois Supreme Court overturned the law as it violated the ITFA. See, No. 114496 (Ill. S. Ct. Oct. 18, 2013). However, as noted above, the ITFA is set to expire November 1 unless Congress passes new legislation, specifically the proposed PITFA, which has already been passed in the House. If the ITFA expires and PITFA is not passed, then Illinois’s click-through nexus law may resurface because the court did not address the commerce clause arguments.

Until Congress enacts legislation to address sales tax nexus, states will keep expanding their reach with broader interpretations of nexus. However, Illinois has shown that state legislation must be carefully crafted in order to avoid discriminatory implementation and undue burden on remote sellers. As new states seek to expand their nexus requirements, they may enact a click-through nexus standard if it provides a rebuttable presumption, applies to all remote sellers and requires minimum thresholds for the collection requirement to be imposed.

Alvarez & Marsal Taxand Says:
While Congress considers a federal solution to the sales tax treatment of remote sellers, states will inevitably get more creative and aggressive with remote sellers. Companies should continue to monitor both federal and state legislation and consult their tax advisor during this dynamic period to ensure that the business meets its sales tax filing obligations. 

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit or

Related Issues:

Click-Through Nexus: A Game of Cat and Mouse

Emboldened by their fellow states, the latest trend for states attempting to generate more tax revenue seems to be new legislative proposals adding affiliate and click-through nexus rules.