By Vanessa Stockwill *
We often muse that “nothing is certain but death and taxes.” However, remote sellers were able to evade the latter until 2018 because a series of Supreme Court decisions held that sales taxes levied against out-of-state businesses are unconstitutional unless the seller has a physical presence inside the state. Because of this requirement, Arizona—like many states—requires customers to pay a use tax on any purchase for which the seller doesn’t collect a sales tax. Since it is impractical to enforce this schema, the physical presence requirement effectively gave remote sellers a tax advantage over businesses with in-state employees, stores, or other physical presence.
In 1992, the Court re-affirmed this physical presence requirement under the Commerce Clause in Quill Corp. v. North Dakota. The Court acknowledged that “a substantial amount of business is transacted . . . [without] physical presence within a State in which business is conducted,” but reasoned that the rule is necessary to prevent states from burdening interstate commerce by subjecting a corporation to the tax collection duties that “might be imposed by the Nation’s 6,000-plus taxing jurisdictions.” After this decision, states began a number of initiatives aimed at reducing the burden of compliance; one of which is the Streamlined Sales and Use Tax Agreement (SSUTA).
In 2016, South Dakota passed a remote sales tax law and filed suit seeking a declaratory judgment against online retailers to determine the law’s validity. The Supreme Court granted cert and noted that “[f]orty-one States, two Territories, and the District of Columbia now ask this Court to reject the [physical presence] test formulated in Quill.” The Court acquiesced and held that states may show the requisite “substantial nexus” for taxation by economic and virtual contacts, but cautioned that a remote sales tax may still be unconstitutional if it discriminates against or imposes undue burdens upon interstate commerce. To this point, the Court noted that South Dakota adopted SSUTA, which “standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions . . . simplified tax rate structures, and other uniform rules.”
Last year, Arizona passed a remote sales tax law, which took effect on October 1, 2019. Rather than adopting SSUTA, Arizona selectively incorporated burden-reducing features like the safe harbor for remote sellers with limited business in Arizona, prospective tax liability, standardizing the “retail” classification across Arizona jurisdictions, requiring a single registration, and waiving licensing fees. However, Arizona’s new law allows over 100 local governments to continue setting their own rates for taxes levied against remote sellers.
It is true that the Supreme Court specifically noted variations in tax rates throughout the Nation’s 6,000-plus taxing jurisdictions as an undue burden on interstate commerce. Nevertheless, Arizona’s novel approach strikes a between standardization and local-control that—with the aid of modern technology and a streamlined registration and filing system—should not unduly burden interstate commerce. Whether Arizona’s balanced approach is enough to satisfy judicial scrutiny is an open question.
*J.D. Candidate, Class of 2022, Arizona State University Sandra Day O’Connor College of Law.
Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of Ill., 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Ariz. Rev. Stat. § 42-5155.
South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2094 (2018).
504 U.S. at 317–18.
Id. at 308.
Id. at 313 n.6.
Nat’l Conf. of State Legislatures, Streamlined Sales and Use Tax Agreement, Remote Sales Tax Collection (Mar. 13, 2020), https://www.ncsl.org/research/fiscal-policy/e-fairness-legislation-overview.aspx (last visited Sept. 25, 2020) (hereafter “NCSL”).
S. 106, 2016 Leg. Assembly, 91st Sess. (S.D. 2016).
Wayfair, 138 S. Ct. at 2095.
Id. at 2099.
Id. at 2100.
H.B. 2757, 44th Leg., 1st Reg. Sess. (Ariz. 2019).
NCSL, supra note 9.
Arizona Dep’t of Revenue, Remote Seller and Marketplace Facilitator Tax Rate Tables (Oct. 1, 2020), https://azdor.gov/sites/default/files/media/TPT_RATETABLE_RSMP_10012020.pdf (last visited Sept. 25, 2020).
 Quill, 504 U.S. at 313 n.6.