Ahead of Holiday Shopping Season, CCH Reviews Recent Federal, State Sales & Use Tax Activities.
In the last three months, both Democrats and Republicans have sponsored Federal legislation to compel online retailers to collect sales and use tax and several states have moved forward with their own legislation, based on a review of online nexus rules by CCH, a Wolters Kluwer business and the leading global provider of tax, accounting and audit information, software and services.
“Whether legislatively compelled at the Federal or state level or through online retailers seeing it as inevitable, the trend is moving toward more online retailers collecting sales and use taxes,” said Daniel Schibley, JD, CCH Senior State Tax Analyst. “While it may not have significant implications for this holiday tax season, consumers should be prepared to start seeing sales tax collected on more and more of their online purchases in the years ahead as cash-strapped states look for more revenue sources.”
Overall, 45 states currently have a sales tax and 16 states have enacted or have legislation proposed to require online retailers to collect sales and use tax or, at the very least, to more strongly urge in-state customers to pay use tax. Sales tax generally has two parts – the sales portion paid by the retailer and the use portion paid by the consumer. Under existing rules, individuals are required to pay personal use tax in states with a sales tax if the retailer does not collect the tax. However, there is very little voluntary compliance among consumers.
Below, CCH reviews the two Federal bills and outlines the strategies states are taking independently under a variety of remote seller collection bills, also known as “Amazon laws,” to increase collection of taxes for online sales.
Marketplace Equity Act and Main Street Fairness Act
Under existing law, retailers are required to collect sales taxes for purchases made in states in which they have a physical presence, or nexus. In Quill vs. North Dakota, the Supreme Court, however, also ruled that sales tax structures across the United States are too complicated to require retailers to collect sales taxes if they have no physical presence and that Congress would need to determine if future systems put in place would be simple enough to compel remote retailers to collect sales taxes.
Toward that end, the bipartisan-backed Marketplace Equity Act (MEA) was introduced in mid-October into the House of Representatives. The bill was in response to the Main Street Fairness Act introduced in July.
The Main Street Fairness Act would give states following the Streamlined Sales Tax (SST) Agreement rules the authority to require retailers, with limited exceptions, to collect sales tax on online purchases, regardless of nexus. The SST effort is an initiative to simplify state sales tax so that there are common definitions for taxable products and uniform procedures across the states. To date, 24 states have passed laws to abide by SST rules. However, the Main Street Fairness Act was introduced in both the Senate and House with only Democratic sponsors.
The MEA, which has the support of the Retail Industry Leaders Association , was introduced with the hopes of gaining support among Republicans. It would not require states to join the SST Agreement or make the system changes required under SST. Rather under MEA, a state would be authorized to require remote sellers to collect tax for sales into that state so long as state law provided the following:
• A small seller exception for remote sellers with gross annual receipts nationwide not exceeding $1 million, or in the state not exceeding $100,000;
• A single tax return for use by remote sellers and a single authority in the state with which the return must be filed; and
• An identical tax base and exemptions throughout the state for remote sellers.
Additionally, under MEA, states would be required to adopt a rate structure for remote sellers, with certain restrictions. The three acceptable rate structures would be:
• A single statewide blended rate that includes both the state rate and local rates;
• A maximum state rate, exclusive of tax imposed by local jurisdictions; and
• A destination rate, which would be the sum of the state rate and the local rate into which the sale is made.
According to Schibley, it’s doubtful the MEA legislation will gain much traction in the current Congressional climate.
“It will be assigned to a committee and could have a hearing before next year, but chances of passage are remote,” Schibley said, adding that among the long-shot possibilities is that it is taken up by the deficit-reduction super committee.
States’ Remote Seller Collection Bills Gain Momentum
While Federal legislation appears stalled, states continue to move forward with their own approaches to require online retailers to collect sales tax. Collectively, these remote seller collection bills require online retailers that have some type of connection with the state to collect state sales tax.
According to Schibley, remote seller collection bills have different state-specific nuances but tend to fall into four general categories:
Click-through-nexus rules generally require an online retailer to collect sales tax if it solicits sales with links on an in-state business’ website and pays those website operators a commission. The argument is that this arrangement is akin to having an in-state sales force. Eight states have passed click-through-nexus legislation:
• New York;
• North Carolina;
• Rhode Island; and
Additionally, click-through-nexus bills have been introduced in Massachusetts, Michigan, Pennsylvania and Tennessee. The Michigan legislation also includes provisions for affiliate nexus, and the Pennsylvania legislation includes provisions for affiliate nexus and reporting and notice rules, both detailed below.
“Amazon has made headlines by canceling all its relationships with partner sites in states that had enacted click-through legislation, with the exception of New York,” Schibley said. He added that last month California lawmakers gave online retailers a one-year reprieve from having to collect sales tax from in-state customers and Amazon agreed to begin collecting by January 2013.
“Amazon is one of the largest online retailers, so people are watching the various disputes in which it is involved and how it is responding,” Schibley said.
Affiliate-nexus rules generally apply if the online retailer has an affiliation with a company doing business in the state; for example, a sister company or subsidiary, selling goods under a similar business name, or sharing in-state employees or facilities. Six states have recently enacted affiliate-nexus laws:
• South Dakota; and
Reporting Requirement Legislation
These rules so far have only been enacted in Colorado and are included in the Pennsylvania legislation. They require a retailer selling into the state but not collecting sales tax to send the state an annual statement of everyone in the state it shipped to and the value of those purchases. The state can then pursue the individual in order to collect the use tax. According to Schibley, the Direct Marketing Association currently is challenging the Colorado law in Federal court and the court has blocked enforcement while the two parties lay out their case.
These rules require online retailers to place a notice on their website informing customers they are required to pay the use tax. States with notification rules include:
• South Dakota; and
D.C. Remote Collection Bill Could Offer Added Insight into Congressional Position
Additionally, Schibley noted that the District of Colombia adopted remote seller legislation in July and because Congress must review all District of Columbia legislation, it’s being closely watched for their reaction.
“The legislation requires remote sellers to start collecting sales tax once the rules have been established,” Schibley said. “But it does not give a lot of detail on what those rules will be, so as district lawmakers define these, people will be looking at how Congress reacts.”
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