Arizona’s Remote Sales Tax: A Look at How We Got Here

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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.[1]  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.[2]  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.[3]

In 1992, the Court re-affirmed this physical presence requirement under the Commerce Clause in Quill Corp. v. North Dakota.[4]  The Court acknowledged that “a substantial amount of business is transacted . . . [without] physical presence within a State in which business is conducted,”[5] 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.”[6]  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).[7]

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.[8]  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.”[9]  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.[10]  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.”[11]

Last year, Arizona passed a remote sales tax law, which took effect on October 1, 2019.[12]  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.[13]  However, Arizona’s new law allows over 100 local governments to continue setting their own rates for taxes levied against remote sellers.[14]

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.[15]  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.

[1]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).

[2]Ariz. Rev. Stat. § 42-5155.

[3]South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2094 (2018).

[4]504 U.S. at 317–18.

[5]Id. at 308.

[6]Id. at 313 n.6.

[7]Nat’l Conf. of State Legislatures, Streamlined Sales and Use Tax Agreement, Remote Sales Tax Collection (Mar. 13, 2020), (last visited Sept. 25, 2020) (hereafter “NCSL”).

[8]S. 106, 2016 Leg. Assembly, 91st Sess. (S.D. 2016).

[9]Wayfair, 138 S. Ct. at 2095.

[10]Id. at 2099.

[11]Id. at 2100.

[12]H.B. 2757, 44th Leg., 1st Reg. Sess. (Ariz. 2019).

[13]NCSL, supra note 9.

[14]Arizona Dep’t of Revenue, Remote Seller and Marketplace Facilitator Tax Rate Tables (Oct. 1, 2020), (last visited Sept. 25, 2020).

[15] Quill, 504 U.S. at 313 n.6.