North Dakota considers online sales tax

Update, 4.26.2017: SB 2298 has been enacted, with a contingent effective date. It becomes effective "on the date the United States Supreme Court issues an opinion overturning Quill v. North Dakota, 504 U.S. 298 (1992), or otherwise confirming a state may constitutionally impose its sales or use tax upon an out-of-state seller" under certain circumstances.

A measure that would require certain out-of-state sellers to collect and remit North Dakota sales and use tax is making its way through the North Dakota Legislature.

Senate Bill 2298 would create economic nexus, whereby an out-of-state seller without a physical presence in North Dakota would establish nexus — a connection that triggers an obligation to collect sales and use tax — with the state through its economic ties to the state. The bill creates a tax collection obligation for out-of-state sellers meeting one of the following criteria in the previous or current calendar year:

• The seller makes 200 or more separate sales transactions in North Dakota
• The seller has gross sales of more than $100,000 from the sale of tangible personal property and other taxable items delivered in North Dakota

Some could call this an attempt at redemption. North Dakota was the losing party in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the seminal Supreme Court decision that upheld the physical presence precedent for sales and use tax. It is largely thanks to Quill that a state cannot require a business to collect and remit sales tax unless it has a substantial physical presence in the state.

Thirty years ago, North Dakota sought to collect tax on Quill’s mail order and phone sales. The measure under consideration today would tax all untaxed sales by out-of-state sellers, including internet sales.

However, the measure is not a frontal assault on Quill. If enacted, North Dakota’s economic nexus policy would not take effect until states have the authority to tax remote sales. Its effective date is contingent on the Supreme Court overturning Quill, “or otherwise confirming a state may constitutionally impose its sales or use tax upon an out-of-state seller in circumstances similar to those specified in section 1 of this Act.”

Several other states, including South Dakota, have enacted or are in the process of enacting economic nexus provisions to directly challenge Quill. South Dakota’s economic nexus law was recently ruled unconstitutional, and state officials are pleased: Such a ruling gets them one step closer to arguing their case before the Supreme Court. Like the North Dakota bill, economic nexus is created under South Dakota SB 106 when a business makes either 200 separate transactions or more than $100,000 in gross receipts in the state in a 12-month period. Unlike SB 2298, the South Dakota policy has a built-in provision that stays the obligations until the constitutionality of the law is clearly established, “for example, a decision from the Supreme Court of the United States abrogating its existing doctrine” (see South Dakota internet tax goes to court).

Until the issue of internet sales tax is settled, some states are likely to continue to pursue the right to tax online sales. Tax automation software facilitates sales and use tax for businesses wishing to voluntarily collect in states where they do business. Learn more.

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