States gearing up to challenge interstate sales tax exemption

In 1992, the U.S. Supreme Court ruled that states can only impose sales taxes on businesses that have a physical presence in those states. Of course, that ruling came down years before internet retailing became possible.

Now that doing business online is ubiquitous, some states are seeking sales tax from businesses like Amazon that routinely sell things to customers in states where they have no brick-and-mortar store, office or warehouse. They are doing this by passing laws at the state level designed to lead to a challenge of the 1992 Supreme Court decision.

A law in Alabama that took effect at the beginning of the year requires vendors with at least $250,000 in annual sales within the state to collect and remit sales taxes. And South Dakota has a similar law that went into effect May 1.

That law is even more aggressive. The threshold for an out-of-state vendor being on the hook for sales tax in South Dakota is now $100,000 or sales or at least 200 unique transactions. In addition, the new law gives the state’s Department of Revenue the right to sue business that did not register with the state for an exemption by Apr. 25. This gives the DOR the initiative to litigate, instead of waiting for businesses to contest a tax assessment.

According to Bloomberg BNA, this appears to be part of a larger strategy. These states seem to be hoping for a lawsuit from a taxpaying business, so that the litigation could eventually reach the Supreme Court. Under this theory, the Court would recognize that its 1992 decision is out of date in the internet age and reverse itself.

If this happens, it could have a serious impact on Maryland companies that do substantial businesses out of state. We will keep an eye on this story for possible developments.

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