Dive Brief:

• A new South Dakota law that aims to collect sales tax from internet purchases has just gone into effect, but is already facing legal challenges from the anti-tax organization NetChoice (which includes Facebook, eBay, Google and Overstock) and the American Catalog Mailers Association. And, outside the legal fray, Blue Nile, one of the 100 largest online retailers as ranked by Internet Retailer, has stopped taking orders from residents, according to Internet Retailer.

• The law requires out-of-state retailers to collect sales tax if they generate more than $100,000 in sales or complete 200 remote transactions involving South Dakota residents each year.

• The South Dakota law, like a recent law in Colorado that has survived court challenges that went to the Supreme Court and back, works around a legal precedent that calls for a retailer to have a “sales tax nexus” in the state—meaning some connection to the state, usually a brick-and-mortar presence.

Dive Insight:

The precedent that is giving lawmakers fits stems from the U.S. Supreme Court’s Quill v. North Dakota decision in the early 1990s—the early days of the internet. Quill has made it difficult if not impossible for states to collect taxes from e-commerce retailers, and as state budgets have become ever leaner, as state sales taxes have edged higher and as e-commerce has grown, officials are pushing for change.

While the U.S. Supreme Court has not made any move to topple the Quill decision, it did make it fairly easy for Colorado to tweak its law to pass muster in the lower courts and has made it clear that Congress could pass legislation that would undo Quill altogether—although the general anti-tax bent of many elected officials, especially in the U.S. House of Representatives, has stymied all attempts to do that so far. 

The original Quill decision helped foster e-commerce over the past decades in a major way, considering that the likes of eBay and Amazon were able to thrive with a significant advantage by liberating consumers from paying sales tax. Quill still puts brick-and-mortar retailers working to boost their omnichannel and digital sales at a decided disadvantage. Notably, Amazon is no longer a major fighter against such laws; its proliferation of fulfillment centers nationwide has given it a "sales tax nexus" in many states.

Critics say unless courts overturn the South Dakota law, other states likely will pass similar web sales tax rules, which would "set the course for enormous tax and administrative burdens on businesses across the country," Steve DelBianco, executive director of NetChoice, said in a statement.

"The burdens outlined in Quill no longer exist," countered South Dakota Senator Deb Peters, a Republican and the main sponsor of the tax legislation, in an email to IDG News. "We've been petitioning Congress for almost two decades to address the issue of remote sales tax collection because the ever-growing problem has negatively impacted local businesses and state revenue. To date, Congress has failed to act, leaving states to take action on their own."