The Taxation Of Online Sales In The United States
By Offshore-E-Com Editorial
A lot has been achieved over the past decade to prepare for a level tax playing field between “Main Street” retailers and their online competitors. However, with a key piece of legislation having stalled in Congress, a solution to this controversial issue remains elusive.
As things currently stand, bricks-and-mortar retailers in states that impose sales and/or use taxes are legally obliged to collect these taxes from customers who make purchases in their stores at the point of sale and remit them to the state tax authority. However, if a resident of the same state chooses to purchase the same item from an online retailer or catalog seller based out-of-state, sales tax usually goes uncollected by the vendor because they don't have a physical presence there, and therefore the state tax authority doesn't have sufficient tax nexus. In fact, under such circumstances, it is normally the buyer's responsibility to account for and pay sales tax on purchases of such items on their tax return, but as one might expect, this rarely happens, and it is a difficult thing for states to enforce.
State and local governments are said to view the taxes they cannot collect on most online sales as lost revenue. It is estimated that the “loophole” costs state and local governments USD23bn in lost tax revenue each year, with California alone facing around USD1.9bn in uncollected sales taxes. What’s more, the this revenue loss is only going to grow along with the share of retail sales made online: Forrester Research has predicted than 25m more Americans will be shopping online in 2016, with each shopper expected to spend on average USD1,738 in that year – USD530 more than they spent in 2012.
The Quill Ruling
The only source of guidance on this issue remains the two decade old pre-internet sales boom ruling by the US Supreme Court in the "Quill" case, which established the "physical presence" test for applying existing sales taxes to out-of-state merchants. Crucially, the Supreme Court also decided in the Quill case that only Congress has the authority to regulate interstate commerce under the Commerce Clause of the US Constitution, therefore leaving it to federal lawmakers to resolve the matter. However, while legislation is in place to prevent the imposition of taxes on Internet access and other "discriminatory" taxes on internet use, Congress has yet to legislate in the area of online sales taxes, allowing a confusing and uncertain situation to arise.
The Streamlined Sales Tax Project
The majority of US states have already responded to the Quill decision by working with local governments and the business community to adopt a comprehensive interstate system to harmonize and simplify their sales tax rules and administrative requirements called the Streamlined Sales and Use Tax Agreement (SSUTA).
The SSUTA focuses on improving sales and use tax administration systems for all sellers and for all types of commerce through all of the following:
- State level administration of sales and use tax collections.
- Uniformity in the state and local tax bases.
- Uniformity of major tax base definitions.
- Central, electronic registration system for all member states.
- Simplification of state and local tax rates.
- Uniform sourcing rules for all taxable transactions.
- Simplified administration of exemptions.
- Simplified tax returns.
- Simplification of tax remittances.
- Protection of consumer privacy.
The agreement defines 69 different administrative terms and products and services that States either tax or exempt. Therefore, according to the Governing Board, a business making sales into a streamlined State only needs to know whether the product or service they sell is taxable or exempt. Also, a streamlined State has just one State tax rate, but is permitted to levy a second (usually lower) State rate in limited circumstances, for example, on food and medicines.
So far 24 states have passed legislation to conform to the SSUTA. However, the Agreement still requires Congressional action for it to be effective, and this has not yet been forthcoming.
Absent new federal laws taxing online sales, state legislatures and governments have taken it upon themselves to ensure that sales taxes are paid on internet purchases, even in situations when the company making the sales has no physical presence in the state, or at least only a highly tenuous one. A number of states have gone about this by requiring affiliates of an internet retailer, which redirect customers to that company's retailing website, to impose state sales tax. Such laws have often been dubbed "Amazon" taxes because, as the country's largest e-tailer, the company has an almost ubiquitous virtual presence, if not a physical one, across the nation, and has been accused of forcing small sales tax-paying bricks-and-mortar retailers out of business.
Initially, Amazon opposed the introduction of "Amazon" taxes and has taken court action against some of these measures, but within only limited success. However, as Amazon taxes have proliferated across the nation, the company now appears to have yielded to their inevitability and is much less likely to challenge them.In 2014 the company is collectingsales tax in 19 states, representing more than half the population.
Amazon now says that federal legislation is “the only way to level the playing field for all sellers, the only way for states to obtain more than a fraction of the sales tax revenue that is already owed, and the only way to fully protect states' rights”.
Despite its acceptance of Amazon taxes and its support for the MFA, recent research suggests that the company is experiencing a reduction in purchases by households living in states that have implemented laws requiring the collection of sales tax on online purchases.
A paper by the Fisher College of Business, University of Ohio, focused on five states – California, New Jersey, Pennsylvania, Texas and Virginia – that began permanent collection of taxes on Amazon purchases between 2012 and 2013. It concluded that households living in those states reduced their expenditures with Amazon by 9.5 percent. In addition, consumers decreased their Amazon spending by 15.5 percent on purchases larger than USD150, and by 23.8 percent on purchases equal to or larger than USD300.
The Market Place Fairness Act
In February 2013, a bipartisan group of 53 Democrat and Republican lawmakers introduced the Marketplace Fairness Act in both the United States Senate and House of Representatives, which would require online retailers to collect sales tax for state and local governments, even though they lack a physical presence in the state. Confusingly, the bill was introduced in the Senate a second time in April 2013 before being passed in the following month. All three bills are virtually identical, although the House has yet to vote on its version of the bill.
One of the aims of the legislation is to level the tax playing field between local “Main Street” retailers and out-of-state internet sellers. Local “bricks-and-mortar” retailers are looked on, by some, as having a competitive disadvantage because they must collect sales taxes at the point of sale, while out-of-state retailers give their customers an effective discount by collecting no state or local sales taxes.
In addition to certifying the SSUTA, the draft legislation would also provide states, which choose to use it, with the clear authority to require remote retailers to collect sales taxes already owed. It would also require them to meet a list of simplification requirements to ease administrative burdens for sellers, with an exemption for remote retailers with less than USD1m in national sales.
The following is a summary of the MFA’s key sections:
Section 2 authorizes each member state under the Streamlined Sales and Use Tax Agreement (the multi-state agreement for the administration and collection of sales and use taxes, adopted on November 12, 2002) to require all sellers not qualifying for the small-seller exception (applicable to remote sellers with annual gross receipts in total US remote sales not exceeding USD1m in the preceding calendar year) to collect and remit sales and use taxes for remote sales under the provisions of the Agreement, but only if such Agreement complies with the minimum simplification requirements relating to the administration of such taxes, audits, and streamlined filing set forth by the Act. It authorizes any such state to exercise its authority under the Act beginning 180 days after publication of its intent to exercise such authority, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.
It allows a state that does not participate in the Streamlined Sales and Use Tax Agreement (non-member state) to collect and remit sales taxes if such state adopts and implements the minimum simplification requirements of the Act. It provides that such taxing authority shall commence no sooner than six months after such state:
- enacts legislation to specify the tax or taxes to which the simplification requirements apply;
- specifies the products and services otherwise subject to such taxes that would be exempt;
- implements minimum simplification requirements, including providing a single entity within the state responsible for all state and local sales and use tax administration, a single audit and tax return for all state and local jurisdictions, and a uniform sales and use tax base for all state and local taxing jurisdictions;
- adopts a uniform rule for sourcing all remote sales;
- provides information indicating the taxability of products and services and exemptions from tax;
- provides free software for remote sellers that calculates sales and use taxes, files tax returns, and updates tax rate changes;
- exempts remote sellers and certified software providers from liability for incorrect collection, remittance, or noncollection of sales and use taxes; and
- provides remote sellers and certified software providers with 90 days' notice of tax rate changes.
Section 3 declares that nothing in the Act shall be construed to:
- subject a seller or any other person to franchise, income, occupation, or any other type of taxes, other than sales taxes, affect the application of such taxes, or enlarge or reduce state authority to impose such taxes;
- create any nexus or alter the standards for determining nexus between a person and a state or locality;
- deny the ability of a remote seller to deploy and utilize a certified software provider of the seller's choice;
- permit or prohibit a state from licensing or regulating any person, requiring any person to qualify to transact intrastate business, subjecting any person to state or local taxes not related to the sale of products or services, or exercising authority over matters of interstate commerce;
- encourage a state to impose sales and use taxes on any products or services not subject to taxation prior to the enactment of the Act; and
- alter or preempt the Mobile Telecommunications Sourcing Act.
Section 4 sets forth definitions used in the Act, including defining "remote sale" to mean the sale of goods or services into a state in which the seller would not legally be required to pay, collect, or remit state or local sales and use taxes unless provided by the Act. It sets forth rules for determining the source of a remote sale (i.e., the location where the product or service sold is received by the purchaser).
Section 6 declares that nothing in the Act shall be construed to preempt or limit any power exercised or to be exercised by a state or local jurisdiction or under federal law.
The effort to approve the bill in the Senate is being led by Mike Enzi (R - Wyoming), joined by Assistant Senate Majority Leader, Dick Durbin (D - Illinois) and Lamar Alexander (R - Tennessee), who introduced the Marketplace Fairness Act in the Senate during the previous Congress. In the House of Representatives, the bill has been introduced by Steve Womack (R - Arkansas), together with Jackie Speier (D – California) who, during the previous Congress, also introduced similar legislation.
“For over a decade, Congressional inaction has created one of the largest tax loopholes of our lifetime,” Enzi said. “It is time to stop discriminating through the tax code and put local and Main Street retailers on a level playing field with their out-of-state and online counterparts. The Marketplace Fairness Act does this without raising taxes and without burdening small businesses.”
Durbin added that: “Businesses do not want special treatment. All they want is a level playing field. By giving states the authority to enforce existing tax laws, the Marketplace Fairness Act of 2013 eliminates the competitive advantage currently enjoyed by many internet retailers at the expense of local businesses.”
As could be expected, reintroduction of the legislation found immediate support from the Retail Industry Leaders Association. In a letter to Senate and House sponsors of the Marketplace Fairness Act, from its Executive Vice President for Public Affairs Katherine Lugar, the need for a level playing field was highlighted.
However, not all are in favor. Amazon has made arrangements to pay sales taxes with various states, but still sees the need for Congressional legislation. Other online retailers, eBay prominent among them, have previously been adamant in their opposition as they believe the bill would harm smaller internet retailers.
Support for that view has been expressed by the Computer & Communications Industry Association that continues to oppose the legislation. It said that: “While we understand and share the desire for state and local governments to be adequately funded in these times, we believe this is the wrong approach. Far from being fair or levelling the playing field, such legislation would create a new imbalance by requiring small online retailers to administer a tax collection regime for multiple jurisdictions, while a brick-and-mortar store needs only collect for the jurisdiction of its physical location.”
The MFA has yet to come up for a vote in the House of Representatives largely because the Republican majority is sensitive to any legislation that might be seen as adding to the nation’s tax burden. Indeed, the voting record in the Senate hints that there is much more support among Democrats for the bill than there is in the Republican ranks, despite the fact that its main sponsor was a Republican. Of the 29 co-sponsors of the Senate bill, 22 are Democrats; and while 21 Republicans voted for the MFA, 22 voted against. In contrast, 46 Democrats voted for the bill, with only five voting against.
In order to get the MFA moving in the House, supporters of the bill in the Senate are considering a new tactic: stitching the MFA together with the Permanent Internet Tax Freedom Act, which would permanently extend a moratorium on internet access taxation and which passed the House on July 15, 2014 by voice vote.
A bipartisan group of Senators have therefore introduced the so-called Marketplace and Internet Tax Fairness Act, which would join the MFA to the Senate's version of the PITFA.
If a joint bill was to be passed in the Senate, it is said that it would force the House to choose between allowing the internet tax moratorium to expire later this year, or accepting a vote on the MFA. However, it is also pointed out that, for that to happen, Democrat leaders in the Senate would have to accept to join the two bills there, and that such a move is likely to encounter substantial resistance. There is also the danger that the MFA will get tangled up in the campaign for more comprehensive tax reform, which is also bogged down in Congress because of partisan differences.
It is unclear whether the MFA will ever be approved. What is more certain is that when members of Congress start playing politics with proposed legislation, the path to approval is usually a long one, and the chances of the MFA landing on the President’s desk before the November midterm elections are remote.