A new state law was deliberately designed to upend the online sales tax debate

Earlier this month, Blue Nile announced that it would temporarily no longer ship to South Dakota, in response to a new state law that says remote sellers must collect sales tax from local residents, even if—and this where the law differs from the similar state laws out there—they have no physical presence in the state (known as nexus). The rule applies only to companies that sell more than $100,000 or process more than 200 in-state transactions a year.

The South Dakota bill is the latest turn in a seemingly endless debate that began in 1992, when the U.S. Supreme Court ruled in Quill v. North Dakota that states do not have the right to collect sales tax from remote sellers if they do not have an in-state presence. But it also left the door open for Congress to supersede the decision. In recent years, members of both parties—as well as President Obama—have expressed support for legislation that would let states collect sales tax from remote sellers.

But as we know, Congress has not been able to accomplish much of anything lately. Despite passing the Senate in 2013, the Marketplace Fairness Act has been blocked in the House, primarily by conservatives that look askance on anything that would increase taxes on consumers (even though proponents argue this would simply mandate the collection of existing taxes). So the issue has largely languished.

Last year, Justice Anthony Kennedy wrote in a decision that Quill is “now inflicting extreme harm and unfairness on the States.” With the growth in e-commerce, he wrote that the “legal system should find an appropriate case to reexamine Quill.”  South Dakota’s law was specifically designed to be that case.

Not that everyone is happy about it. The American Catalog Mailers Association and trade group NetChoice filed suit to overturn the law, saying “states simply don’t have the authority to pick and choose the Supreme Court decisions they will follow.” That said, Blue Nile appears to be one of few major retailers that has decided to stop selling in the state entirely, though it may be joined by others. (Some companies have allegedly decided not to comply; the state is now suing them.) On the other hand, 70 remote sellers are going along and have applied for an in-state sales tax license, according to The Argus Leader.

Blue Nile’s decision is somewhat surprising, given that its CEO has said he expects an online sales tax may pass. It also clearly believes that its future includes some form of brick-and-mortar presence; one of its new webrooms is in Virginia, which means the company will now accept nexus—and collect sales tax—there.

With online sales continually growing and regularly outpacing brick-and-mortar sales, everyone—even people from direct marketing association trade groups—agrees something will happen eventually. If South Dakota has its way, that day may come sooner than we think.

Rob Bates

JCK News Director