A 1992 Supreme Court decision Quill Corp. v. North Dakota established the principle that an out-of-state retailer does not have to collect state sales tax if it does not have a physical location—a store, business office, or warehouse—in the state where the purchase originated.
Theoretically, the consumer placing the order in a state that has a sales tax could be responsible for paying the tax on an out-of-state order. An out-of-state retailer can voluntarily collect sales tax and remit it to the state, but there is no legal obligation for it to do so. Because requiring consumers to “self-report” on large numbers of small transactions is burdensome, states generally do not do it, except on very expensive out-of-state purchases.
Sales Taxes on Online Transactions
The long-established principle that out-of-state stores with no in-state presence need not collect sales tax has been challenged in the Internet era. Many brick-and-mortar businesses have complained that out-of-state online companies have an unfair advantage because they do not have to charge customers sales tax. States have also lost billions in sales tax revenue to tax-free online orders.
In 2008, New York enacted the so-called “Amazon Tax” forcing Amazon and similar e-tailers to collect sales tax. New York got around the Quill requirement of a physical presence in the state because Amazon has countless affiliates and “associates” marketing products through it, and some of those are located in New York. Other states have enacted similar laws. Illinois, for example, passed the “Main Street Fairness Act” targeting online retailers with affiliates in Illinois. Currently Amazon collects sales tax in 23 states.
Some online retailers, such as Overstock.com, have cancelled affiliate programs in states with an “Amazon Tax” to avoid having to collect state sales taxes.
Which States Have an “Amazon Tax”?
Currently 23 states have sales taxes on online retailers like Amazon: