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More States May Collect Sales Tax from Online Retailers


Supreme Court decision on Colorado law sets precedent

Because of a recent decision by the U.S. Supreme Court, online businesses may increasingly find their accounting complicated by state sales tax laws. However, small brick-and-mortar companies in those states may welcome a level playing field.

Legislative background

In December 2016, the Supreme Court let stand a 2010 Colorado law that pushes online retailers to collect sales tax. The case involved the constitutionality of requiring out-of-state businesses to inform Colorado buyers of their purchases each year, and sending that information to the Colorado Department of Revenue. The Supreme Court's refusal to hear the case affirmed a federal court's ruling that upholds the so-called "Amazon tax," a nod to the online retailing giant.

The Direct Marketing Association (DMA) challenged Colorado's online sales-tax collection law in the 10th circuit court. The DMA relied on a 1992 case, Quill Corp. v. North Dakota, in which the Supreme Court ruled that a state can't require retailers to collect sales tax if they don't have a physical presence in the state. Colorado lawmakers passed the 2010 regulation to boost sales tax revenue.

DMA claimed that the law unconstitutionally discriminates against interstate commerce. The crux of the matter is whether a company's "physical presence" — the standard language regarding the collection of sales tax — should be replaced with the term "economic nexus." States that pass such legislation or issue administrative rules that modify this language may require internet sellers to collect sales tax where they do not have a physical presence.

Colorado joins other states requiring taxes for online sales

Coloradans began paying 2.9 percent sales tax on purchases on February 1, 2016. Citizens of Ohio and Illinois had been doing so since 2015. In October 2016, Michigan residents started paying 6 percent sales tax on their Amazon purchases.

These internet sales tax levies are intended to ensure fairness between online retailers and brick-and-mortar establishments, as well as to garner revenue for the states. In 2014, the Colorado Department of Revenue estimated its losses from online tax "leakage" at more than $170 million a year.

The Supreme Court's refusal to appeal the Colorado law led some to believe the justices are waiting to see how states and the lower courts deal with the dilemma before they step in to address any constitutional issues.

If your company sells its products on the internet, keep following this story line. Its evolution may be critical to your administrative processes and your profits.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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