Remote Seller Compliance: Rhode Island Follows South Dakota’s Lead

Rhode Island has had an internet sales tax law on the books since 2009. It is often called an “Amazon tax” — an ironic moniker, given that Amazon severed ties with Rhode Island affiliates so that it wouldn’t have to collect the tax (Amazon’s Associates Agreement clearly states that residents of Rhode Island are ineligible to participate in the program). Since Amazon “accounted for 60% of all U.S. online sales growth last year,” Rhode Island’s internet sales tax law isn’t very effective. The state misses out on approximately $30 million in annual sales tax revenue from untaxed remote sales. Although Rhode Islanders are supposed to voluntarily remit use tax on these transactions, few do.

Now state lawmakers are considering a different approach: a remote sales tax collection bill loosely inspired by South Dakota’s new remote seller compliance law.

South Dakota

Unlike many state internet laws, South Dakota’s new remote seller compliance law does not say that remote retailers have established nexus (a connection that triggers tax liability) with South Dakota through links on websites or ties to affiliates. Instead, it states that remote retailers doing a certain amount of business in the state and not collecting sales tax are “seriously eroding the sales tax base of this state.” It argues that such retailers “benefit extensively from this state’s market … [and] infrastructure,” and claims that their refusal to collect and remit South Dakota sales tax “causes imminent harm to this state.”

The law is therefore a direct challenge to Quill, the 1992 Supreme Court Decision (Quill Corp. v. North Dakota) that reaffirmed the need for a business to have a physical presence in a state in order for that state to impose tax on its sales transactions. It argues that remote sales tax collection is “neither unusually difficult not burdensome” due to the modern computing and software options” currently available to businesses. And it points out that Supreme Court Justice Kennedy, in a recent concurring opinion (Direct Marketing Association v. Brohl), said there was a need to reconsider “the doctrine that prevents states from requiring remote sellers to collect sales tax.” The new remote seller compliance law was created to be challenged and provide an opportunity to reconsider the precedent set by Quill.

It could be working. The bill took effect on May 1, 2016, and has already triggered two legal battles. The American Catalog Mailers Association and NetChoice are legally challenging the law as “an unconstitutional expansion of state tax powers” that is in direct conflict with the "precedent set by the Supreme Court of the United States.” In addition, the state of South Dakota is taking four remote sellers to court for refusing to comply with the law.

Rhode Island

Rhode Island House Bill 7375 begins with legislative findings that explain why it is no longer reasonable to base a sales tax collection requirement on a business’s physical presence in a state. It points out that the Commerce Clause “prohibits states from imposing a burden on interstate commerce only when it constitutes an undue burden” and insists that sales tax collection is no longer an undue burden:

• “[D]ue to the ready availability of sales and use tax collection software, it is no longer an undue burden for companies without a physical presence in Rhode Island to accurately compute, collect and remit their sales and use tax obligations.”
• “[G]iven the exponential expansion of online commerce and related technology, it is no longer an undue burden for states to require remote sellers to collect sales and use taxes.”
• “[T]he sales and use tax system established under Rhode Island law does not pose an undue burden on out-of-state retailers and provides sufficient simplification to warrant the collection and remittance of use taxes by out-of-state retailers that are due and owing to Rhode Island and its local jurisdiction.”

To facilitate a challenge to the measure, it clarifies that appeals may be made directly to the state supreme court “if the primary issued raised by the petitioner is the constitutionality of this chapter.”  Read the text of the bill for full details.

If enacted as written, Rhode Island’s new internet tax law would take effect January 1, 2017.

As more and more states go after remote sales tax revenue, businesses should consider facilitating compliance with Avalara AvaTax. Learn more.

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