New online sales tax laws challenged in Indiana and Wyoming
- Jul 17, 2017 | Gail Cole
Both Indiana and Wyoming are facing legal action over their new economic nexus laws, which took effect July 1, 2017.
The laws impose a tax obligation on remote sellers based on their economic ties to each state. In both Indiana and Wyoming, out-of-state sellers are now required to collect and remit tax if they make more than 200 separate sales transactions annually in the state, or more than $100,000 in annual gross revenue from in-state transactions. Indiana and Wyoming take the position that this amount of economic activity is substantial enough to merit taxation, even of businesses lacking a physical presence in the state.
This makes them vulnerable to legal action. Precedent upheld by the United States Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) maintains that a state cannot impose a tax obligation on a business unless it has a substantial connection to the state, defined as a physical presence. The attorneys representing NetChoice and the American Catalog Mailers Association, the plaintiffs in both the Indiana and Wyoming suits, claim the economic nexus provisions are “directly at odds with the physical presence, substantial nexus standard for state sales taxes reaffirmed in Quill” (Brannlaw.com).
Economic nexus found unconstitutional in South Dakota
This spring, a similar economic nexus law in South Dakota was found to be unconstitutional by a state circuit court. Instead of being dismayed by the ruling, South Dakota officials were pleased. The state is prepared to defend its economic policy all the way to the Supreme Court, which it hopes will be open to reconsidering Quill.
In fact, some states are creating economic nexus laws with the expectation, if not the hope, that they will be challenged. As the National Governors Association (NGA) explains, “The South Dakota law was designed to be challenged.”
So was Alabama’s economic nexus rule. When it was issued by the Department of Revenue in 2015, then Governor Robert Bentley praised it and said he hoped Amazon or another internet seller would sue Alabama over it. His reasoning? The faster a case gets into the court system, the sooner Alabama and other states can start collecting tax revenue from remote sellers (Alabama to Amazon: Sue Me). It took almost a year, but eventually Alabama’s economic nexus provision was challenged, and legal action is still pending.
Calls for a level playing field
Both the NGA and the National Conference of State Legislatures support a level playing field, one where remote online vendors and local Main Street sellers are subject to the same sales taxes. The organizations support a congressional solution, and Congress could grant states the authority to tax remote sellers. The Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017 would give states this power.
No taxation without representation
But clearly, imposing a tax obligation on remote retailers is not universally supported. Opponents raise the issue of taxation without representation and worry that taxing internet sellers will constrict innovation and the economy. The No Regulation Without Representation Act of 2017, introduced by Rep. Jim Sensenbrenner, would codify Quill’s physical presence standard and put the issue to rest.
Economic nexus in Indiana and Wyoming on hold
Neither Indiana nor Wyoming can enforce their economic nexus laws while legal action is pending.
State sales tax laws are in flux as legislatures attempt to obtain more tax revenue from remote sellers. Therefore, companies that sell remotely are advised to keep a close eye on enacted and proposed legislation. The Professional Services team at Avalara can help businesses understand sales and use tax obligations and plan compliance strategies. Learn more.