eCommerce and Sales Tax Collection: A Taxing Topic

The issue of sales tax collection has been an ongoing controversy since the early days of eCommerce retail sales.  In general, businesses were required to collect sales tax if they had a physical presence in the state of the purchaser (known as nexus).  This practice placed brick and mortar retailers with a web presence at a distinct disadvantage in terms of total purchase price compared to pure play eCommerce retailers with a very limited physical presence.

Many pure play eCommerce retailers have actively promoted a “no sales tax” benefit in purchasing from their site. So, too, have single store retailers with a robust eCommerce operations such as B&H Photo or US Appliance.  Legally, residents in states with sales tax generally are obligated to report purchases on which sales tax was not charged to their state of residency and pay the prevailing tax.  In reality, many consumers are unaware of this law, resulting in 96% of those taxes not being collected.

The evolution of the sales tax situation is long and circuitous, with its origin in the Constitution which gave the Federal government the power to stop any state government from interfering with interstate commerce. In 1977, the Supreme Court finally swept aside two centuries of increasingly unworkable precedent and formally authorized states to tax businesses engaged in interstate commerce under a number of conditions. This ruling was affirmed by the 1992 Supreme Court ruling in Quill v. North Dakota, where the Court strongly reaffirmed the physical presence rule for sales and use tax collection.

On June 21, the U.S. Supreme Court overturned its 1992 Quill decision, meaning eCommerce companies must now collect sales tax regardless of whether they have a physical presence in a state. The Court laid out why South Dakota’s law is no burden to interstate commerce but made clear that more complex or overreaching laws would be.

Justice Kennedy’s opinion states in part:

“…South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state-level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.”

So, what does this mean for eCommerce retail?

Clearly, the states that have adopted a streamlined sales tax approach will be emboldened to collect sales tax from eCommerce retailers. Well first, many online transactions currently are incurring sale tax charges since 43 of the top 50 ecommerce retailers have physical locations in most states and therefore are currently charging sales tax. So, for the consumer, there will be no change when purchasing from these retailers.

There are 31 states that tax internet sellers without a physical presence. It is anticipated that the first phase of sales tax application will be for those 23 states that have adopted a streamlined sales tax approach since this is one of the pivotal aspects of the Supreme Court ruling.  Consumers can expect to see sales tax added if they are residents of these states:

Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.

Some states have passed “click through nexus” statutes demanding that out-of-state retailers collect sales tax, leading to extended litigation and uncertainty. In other states, sales tax calculations can be immensely complex with many permutations to calculate the accurate tax which comprises a state rate and may include county and local rates. It is the current thought that retailers will not be compelled to collect tax in these jurisdictions

Congress, recognizing that the sales tax issue crosses state and local jurisdiction, has also gotten into the fray but legislation has become bogged down. Both Senate bill S.698, the Marketplace Fairness Act of 2015 (MFA) and House bill H.R. 2775, the Remote Transactions Parity Act (RTPA) would compel retailers to collect taxes on remote sales based on the location of the consumer. Alternative proposals would be to base sales tax on the location of the seller.  This legislation has been in a political logjam with opponents citing the Quill v. North Dakota precedent, which now, of course, has been overturned.

It now will be interesting to see how quickly, if at all, this legislation moves forward.

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