In Quill Corp. v. Heitkamp (1992), 504 U.S. 298, the United States Supreme Court found that states cannot require out-of-state retailers to collect sales taxes unless they have a physical presence, or nexus, within the state. Thus, online sellers do not have the power to collect tax on Internet sales to customers in other states, as such taxes are considered an interference with interstate commerce. However, if an online business is selling tangible personal property, it is likely required to collect sales tax in the state where its inventory is located or where it has a “bricks-and-mortar” store. Also, although no state may require out-of-state e-businesses to collect and remit taxes on sales to its residents, states may still require residents to remit such taxes themselves. Such a tax is referred to as a “use” tax. The difficulty is that it is nearly impossible for states to enforce such laws, so states have no choice but to rely on the honor system in collecting use taxes.
States have complained about their lack of ability to collect sales tax for Internet purchases, citing lost taxes as high as $13 billion for 2001. However, exclusively online e-tailers argue that if they are required to collect sales taxes and pay them to the proper taxing authorities, it will be extremely difficult to comply with nearly 8,000 state and local taxing jurisdictions, each with different rates and rules. One proposal that the National Governors’ Association (NGA) has countered with is for the establishment of a “trusted third party,” which would calculate and collect for the online businesses the appropriate local and state sales taxes. However, the NGA’s lobbying efforts to allow states to tax such online purchases from remote sellers has yet been to no avail, as indicated by the passage of the Internet Tax Non-Discrimination Act.