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Limits on State Taxation of Internet Sales

When can a state impose sales tax collection liability on an e-tailer or other remote seller.
The Supreme Court has placed some limits on a State's right to reach an out of state seller.

Limits on State Taxation of Internet Sales

A dealer in Illinois sells equipment to a customer in Ohio in an online transaction. Is this sale taxable under Ohio sales tax laws? If so, is the dealer responsible to collect the tax from its customer and remit it to the Ohio state and local taxing authorities?

There are approximately 7,500 state, county and local tax jurisdictions in the United States which claim various percentages of a sale at retail. In most jurisdictions the laws impose a dual liability for the tax on both the buyer, who is responsible to pay the tax to the seller or the government, and on the seller, who is responsible to collect the tax from the retail buyer and pay it over to the government.

Obviously, becoming well versed on all the various sales tax laws and regulations is a daunting task. Oftentimes a particular product sold in one state may be taxable while the same product sold in another state may be exempt from tax under state law. A useful website that acts as a portal to the various state sales tax laws and regulations is

Let's turn to the duty to collect the tax. The U.S. Supreme Court has provided businesses with some guidance on whether a state may lawfully obligate an out-of-state seller to collect and remit that state's sales tax. The most recent case involved a "bricks-and-mortar" mail-order seller of office products with offices and warehouses in Illinois, California and Georgia who was making sales into North Dakota. (Quill Corp. v. North Dakota, 504 U.S. 298). Quill had no employees working or residing in North Dakota; owned no property in that state; and delivered all products to North Dakota customers via mail or common carrier from out-of-state locations. Lacking a substantial enough "physical presence" in North Dakota, the Court held that the Commerce Clause of the U.S. Constitution precluded North Dakota from imposing its sales tax liability on Quill.

Internet sales transactions provide another example. Borders Group, a national bookstore chain with stores in 40 states also makes online sales through its wholly owned subsidiary, which has a "presence" in only two states - - offices in Michigan and a warehouse in Tennessee. Like Quill, the online seller has no employees working or residing in the other states, made no deliveries in those states other than by mail or common carrier and owned no property in the other states. Accordingly, the online seller only collects sales tax on sales to customers in Michigan and Tennessee.

Whether a remote seller has a substantial enough presence in a state to allow that state to tax the seller requires a careful analysis of all the facts and the seller's activities and presence in that state. However, there are limits on a state's power to tax interstate sales under the Commerce Clause as enunciated by the Supreme Court. Although Congress may intervene using its powers to alter these limits, so far it has declined to do so.


Keeley, Kuenn & Reid, a Chicago based law firm, is engaged in the practice of business and commercial law, employment law, taxation, antitrust, product liability and legislative matters. Through its affiliates, the firm also meets its clients' needs in protecting intellectual property rights and international commercial law matters.

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