States continue to tussle with the fallout from the Great Recession, a downturn that caused cumulative budget shortfalls of nearly $550 billion during the 2009 through 2012 fiscal years. But even when the national economic recovery is more robust and states begin to experience a noticeable pickup in economic activity and revenues, they will have to contend with the structural flaw in their tax systems that largely prevents the collection of sales taxes on e-commerce purchases. This is because a 1992 U.S. Supreme Court ruling–Quill Corporation v. North Dakota–held that online retailers are required only to collect sales tax on a transaction if they have a physical presence in a the state of the purchasing customer.
In addition, the 1998 Internet Tax Freedom Act places a moratorium on any new taxes on e-commerce transactions, presenting another federal hurdle that states must overcome. For a number of years now, online-only retailers like Amazon, Overstock.com and diamond Internet retailer Blue Nile have resisted collecting sales taxes on behalf of state and local governments. The driving force behind this resistance is that applying a sales tax effectively raises the price of items, a move that would make the online retailer less competitive compared to a bricks-and-mortar store. While a permanent solution must involve federal legislation, states have not been sitting idly by awaiting that action.