By Danny Restivo
As the holiday season nears, many shoppers will purchase gifts without ever leaving their home. The convenience of e-commerce has led to tremendous popularity, accounting for more than a third of all retail sales in the United States. According to the U.S. Commerce Department, online sales totaled $341 billion in 2015, a 14.6 percent increase from 2014 when figures totaled $298 billion.
The explosive growth of e-commerce has made shipping giants, such as Amazon, a lucrative target for states seeking tax revenue. However, tracking and collecting sales tax from online purchases has created certain challenges. Currently, most states operate off the precedent set under the Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota. The court ruled states could only collect sales tax on an item if the out-of-state seller has a physical presence, known as a nexus. If there is no nexus, consumers must pay the tax themselves. Yet, roughly four percent of online buyers pay the respective state’s sales tax, according to estimates.
Since 2009, twenty-nine states have enacted legislation geared toward taxing online commerce in an attempt to level the playing field with brick and mortar stores. As one of the largest e-commerce companies in the world, Amazon has become the scapegoat for state legislatures trying to enact online sales tax. Yet when states did enact an “Amazon tax”— which labeled distribution centers and affiliate locations as a physical space—the company threatened to leave unless tax abatements or incentives were offered. In 2015, when Ohio enacted an Amazon tax, the state agreed to waive sales tax on all equipment purchases made by Amazon for three facilities within the state. Ohio also sweetened the deal with $81 million in tax incentives. In 2010, Texas asked Amazon to pay $269 million in back taxes from 2005 to 2009 after online sales tax legislation was approved. As a result, Amazon closed its only distribution center within the state. The site reopened after the Texas Attorney General agreed to forgive the back taxes, and Amazon said it would create 2,500 jobs and invest $200 million in distribution centers. Similar agreements have played out in Illinois, California and South Carolina.
While Amazon has received headlines for opposing an increase in state taxes, eighty-five percent of the online retail purchases occurred within the top 1,000 retail stores in America. Most of these stores have a large physical presence and online taxes are easy to track. For smaller internet-based operations, an increase in sales tax could limit or end growth opportunity.
Questions still remain over online sales tax rates, especially when interstate exchanges occur between states with differing tax policies. Many states have tax exemptions for a variety of items, as well as different guidelines for the location of the buyer and seller. Furthermore, five states—Alaska, Delaware, Montana, New Hampshire and Oregon—do not have a sales tax, while Alaska does permits local sales taxes and Delaware has a rental and use tax. The current patchwork may allow online companies to game the system with tax havens in certain states, or provide an unfair advantage to businesses in other states.
Several pieces of congressional legislation were crafted in an effort to assuage the situation. In the past three years, Congress debated two items: the Marketplace Fairness Act of 2013 and the Remote Transactions Parity Act of 2015. Both would have given states the right to levy taxes on businesses without a physical location, but proposals floundered in a House dominated by anti-tax Republicans. Critics, including former House Speaker John Boehner (R-OH), cited the laws ability to tax outside a state’s legal jurisdiction. Sen. Ted Cruz (R-TX) called the Marketplace Fairness Act, which was sponsored by Rep. Steve Womack (R-AR), “a job-killing tax hike, plain and simple. It is, in effect, a national Internet sales tax, which would hammer the little guy and benefit giant corporations.”
In August, House Judiciary Chairman Bob Goodlatte (R-VA) introduced draft legislation titled the Online Sales Simplification Act of 2016, which would allow states to tax online items regardless of physical presence. Goodlatte’s proposal allows taxes on remote sales (interstate sales), with the tax rate established by the buyer’s state. OSSA would establish a tax clearinghouse where states would receive disbursements of sales tax collected by remote sellers. Using a “hybrid-origin” approach, each state in the clearinghouse would set its own online sales tax, which sellers are required to collect from buyers in their respective state.
For example, if Joe were selling iPhone accessories in Ohio to 10 people in Maryland, he would use the remote sales tax rate in Maryland for all the items, instead of creating 10 separate rates. In the current system, Joe would have to include local and special rate tax for each item’s destination. With OASSA’s clearinghouse, Joe would place a uniform sales tax for Maryland on all the items. If those items were tax exempt in Maryland, Joe would not have to include it.
This online sales tax policy raises a lot of questions, including how do sellers in states with sales tax deal with buyer’s in states without sales tax, and vice versa. Furthermore, how do sates deal with buyers in states not participating in the clearinghouse? Under the current draft, participation in the law is optional. Ultimately, the law does attempt to level the playing field between small and big business, which has drawn applause from some the world’s biggest retail supporters.
Following the proposal, Joe Rinzel, senior vice president for government affairs for the Retail Industry Leaders Association of America, released a statement saying, “retailers have worked earnestly with Chairman Goodlatte for several years to resolve this issue. While retailers welcome today’s action by the Chairman to move the process forward, we will continue to press for changes that achieve true parity at the point of sale.”
Goodlatte has already met with several leaders in the GOP-dominated House and Senate to discuss his proposal. Senate Majority Leader Mitch McConnell (R-KY) has expressed interest in passing online sales tax legislation before the year is out.
While federal lawmakers push e-commerce regulatory policies, several states have already introduced online sales tax reform. In 2016, seventeen states proposed sales tax legislation, while four states—Washington, South Dakota, Louisiana and Oklahoma—have already enacted legislation. Meanwhile, Tennessee, Arizona, Utah and Colorado are among states to have all updated provisions on the topic.
In 2016, Louisiana lawmakers approved legislation that allowed officials to tax Internet businesses with no physical presence inside its jurisdiction. Act 22 also requires out-of-state businesses with affiliates in Louisiana to remit taxes on sales made to residents. The law specifically affects Internet entrepreneurs, like popular youtube accounts, bloggers, podcasts and others who typically link or refer customers to online retailers like Amazon, before receiving a kick back from the company. Those media entrepreneurs must now remit taxes on all referral payments in the state. In Oklahoma, House Bill 2531, which was approved in May, expands the definition of online retailers who have to pay sales tax. The law goes beyond the requirement of a “physical presence” and includes any retailer selling items in Oklahoma, including Amazon.
While brick and mortar retailers applaud online sales tax efforts, consumers could see legislative efforts from a different perspective. Not only would an online sales tax increase prices, it will also encroach on consumer sovereignty. Ultimately, many consumers will end up paying taxes approved by legislators or governors outside their legal jurisdiction. Furthermore, if a federal policy is approved, there’s little chance legislation will support a more competitive environment. As a result, there will be little incentive for states to keep sales tax low.
If OSSA legislation is approved by Congress, the existing patchwork of online legislation would remove the “nexus” requirement set by the court in 1992, creating the groundwork for a uniform federal tax policy. Although, the results of a tax clearinghouse still remain uncertain. If a national clearinghouse is established without overwhelming participation, it could be a serious challenge for Internet entrepreneurs. Mid to small-sized internet businesses will be stuck navigating a challenging world of tax laws, without the benefit of a large lobbying effort on their behalf. While discussions between lawmakers continue, many Internet companies, no matter their size, are hoping for a law that will keep their organization competitive.
Other States with Notable Online Sales Tax Regulations
In November, Alabama began collecting and remitting an 8-percent sales tax on all online retailers as part of the state’s Simplified Use Tax Remittance Program Act of 2015. The law allows online retailers to opt into a fixed transaction tax rate, rather than paying state and local sales taxes. The fixed transaction rate allows for a 2-percent discount on taxes collected by the seller. More than 75 businesses have participated in the program, while legislators have promised not to raise the current tax on any member who joins, even if federal legislation is enacted.
In January 2016, Amazon announced that it would begin to collect a 2.9-percent sales tax on all online purchases. Previously, it was up to the consumer to pay the sales tax, while the retailer simply had to remind the purchaser of their duty. Amazon’s decision comes on the heels of a 2014 Department of Revenue report that said the state was losing more than $170 million annually. Additionally, a 2015 lawsuit by the Direct Marketing Association highlighted concerns by retailers and lawmakers. The lawsuit wants to ensure that all out-of-state sellers in Colorado report their sales and purchases.
In October 2015, Michigan began collecting a 6-percent sales tax on all online purchases. The law mandates that anyone with a physical presence in Michigan must pay taxes.
In November, Mississippi Attorney General Jim Hood asked the Supreme Court to overturn the 1992 ruling in Quill Corp. v. North Dakota. In a release, Hood said, “If local stores are unable to compete with out-of-state online retailers, we lose jobs, an important tax base and a critical investment in our communities. We’re asking the Supreme Court to even the playing field for merchants and to allow the states to gain the revenue that should be due to them.”
Governor Dennis Daugaard signed S.B. 106 into law in March, forcing online businesses that sell more than $100,000 worth of goods in South Dakota, or process more than 200 orders, to pay sales tax. The law also states that volume of sales dictates “a presence.”
The Volunteer State has the highest average combined rate of state and local taxes, roughly 9.46 percent. In August, Governor Bill Haslam proposed legislation that would level the online sales tax environment between in-state and out-of-state businesses. The law would require out-of-state businesses to collect and pay taxes if their sales exceed $500,000 in Tennessee. In 2014, the state approved its own Amazon tax, which levied a 9.25-percent sales tax on all Amazon purchases.