There's been controversy over businesses collecting sales tax in states where they're not physically located for decades.
National Bellas Hess was a mail-order company located in Missouri with no offices or facilities in Illinois. The company sued Illinois when the state tried to force it to collect sales tax. Illinois officials contended that National Bellas Hess, by doing business with Illinois residents, had a physical presence in the state and therefore should be forced to collect taxes on shipments to Illinois.
The case made it all the way to the U.S. Supreme Court in a case called National Bellas Hess v. Department of Revenue of Illinois. In 1967, the Supreme Court ruled that forcing companies to collect what's known as remote sales tax could create too much of a burden on them. That was long before the Internet arrived, and before the proliferation of catalogs began in the 1980s.
The court revisited the issue in 1992, in Quill v. North Dakota. Quill was an office supply company incorporated in Delaware and with offices and warehouses in Illinois, California and Georgia. Quill fought back when North Dakota sought to force the company to collect sales tax from North Dakota customers. The Supreme Court again ruled that states could not force out-of-state sellers to collect sales tax. But it in effect invited Congress to create a law that would give the states the authority to require that taxes be collected. That ruling also came before the explosion of e-commerce — it was 10 years before Amazon.com started selling books over the Internet. (North Dakota's tax commissioner at the time of the lawsuit was Heidi Heitkamp, who was elected to the U.S. Senate this past November).
In 1999, two state organizations, the National Governor's Association and the National Conference of State Legislatures, created the Streamlined Sales Tax Agreement to simplify their taxes and make them easier to collect. Among other things, the agreement calls for taxes to be collected by state taxing authorities, so sellers don't have to submit taxes and tax returns to a variety of jurisdictions. It also provides for software to be used to ease the tax collection process for sellers. Forty-four states took part in writing the agreement, but only 24 have passed legislation to conform with it.
Proposed legislation that Congress is expected to consider on the issue incorporates some of the provisions in the streamline agreement. It requires states that have not passed legislation to conform to the agreement to take steps to simplify their tax collection. Among them: Provide software to sellers to help them compute the taxes they're required to collect.
And it exempts small sellers — those with remote sales under $500,000 — from having to collect the tax. However, that threshold may be raised as the legislation is debated in Congress.