SCOTUS Ready to Reverse Bellas Hess & Quill Allowing States to Compel Online Sales Tax Collection

March 3, 2015

Cite as: 575 U. S. ____ (2015)
KENNEDY, J., concurring

SUPREME COURT OF THE UNITED STATES

No. 13–1032
DIRECT MARKETING ASSOCIATION, PETITIONER v.
BARBARA BROHL, EXECUTIVE DIRECTOR,
COLORADO DEPARTMENT OF REVENUE
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE TENTH CIRCUIT

[March 3, 2015]

JUSTICE KENNEDY, concurring.
The opinion of the Court has my unqualified join and assent, for in my view it is complete and correct. It does seem appropriate, and indeed necessary, to add this separate statement concerning what may well be a serious, continuing injustice faced by Colorado and many other States.

Almost half a century ago, this Court determined that, under its Commerce Clause jurisprudence, States cannot require a business to collect use taxes—which are the equivalent of sales taxes for out-of-state purchases—if the business does not have a physical presence in the State. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967). Use taxes are still due, but under Bellas Hess they must be collected from and paid by the customer, not the out-of-state seller. Id., at 758.

Twenty-five years later, the Court relied on stare decisis to reaffirm the physical presence requirement and to reject attempts to require a mail-order business to collect and pay use taxes. Quill Corp. v. North Dakota, 504 U. S. 298, 311 (1992). This was despite the fact that under the more recent and refined test elaborated in Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977), “contemporary Commerce Clause jurisprudence might not dictate the same result” as the Court had reached in Bellas Hess. Quill Corp., 504 U. S., at 311. In other words, the Quill majority acknowledged the prospect that its conclusion was wrong when the case was decided. Still, the Court determined vendors who had no physical presence in a State did not have the “substantial nexus with the taxing state” necessary to impose tax-collection duties under the Commerce Clause. Id., at 311–313. Three Justices concurred in the judgment, stating their votes to uphold the rule of Bellas Hess were based on stare decisis alone. Id., at 319 (SCALIA, J., joined by KENNEDY, J., and THOMAS, J., concurring in part and concurring in judgment). This further underscores the tenuous nature of that holding—a holding now inflicting extreme harm and unfairness on the States.

In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy. There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, “interstate commerce may be required to pay its fair share of state taxes.” D. H. Holmes Co. v. McNamara, 486 U. S. 24, 31 (1988). This argument has grown stronger, and the cause more urgent, with time. When the Court decided Quill, mailorder sales in the United States totaled $180 billion. 504 U. S., at 329 (White, J., concurring in part and dissenting in part). But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States. App. 28.

Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors. See California State Board of Equalization, Revenue Estimate: Electronic Commerce and Mail Order Sales, Rev. 8/13, p. 7 (2013) (Table 3). The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register. The facts of this case exemplify that trend: Colorado’s losses in 2012 are estimated to be around $170 million. See D. Bruce, W. Fox, & L. Luna, State and Local Government Sales Tax Revenue Losses from Electronic Commerce 11 (2009)(Table 5). States’ education systems, healthcare services, and infrastructure are weakened as a result.

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront. See PricewaterhouseCoopers, Understanding How U. S. Online Shoppers Are Reshaping the Retail Experience 3 (Mar. 2012) (nearly 70% of American consumers shopped online in 2011). Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. See Pearson v. Callahan, 555 U. S. 223, 233 (2009) (stare decisis weakened where “experience has pointed up the precedent’s shortcomings”). It should be left in place only if a powerful showing can be made that its rationale is still correct.

The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.


What’s wrong with “Hybrid-Origin” Sourcing?

January 21, 2015

On January 9, 2015, the National Conference of State Legislature‘s Task Force on State and Local Taxation convened a legislative hearing on the matter of remote sales tax collection. Testimony was provided by twelve witnesses including:

  1. Steve DelBianco from NetChoice
  2. Hamilton Davison from the American Catalog Association,
  3. Devin Whitney from PayPal
  4. Mike Massey from Massey’s Outfitters
  5. Craig Johnson from the SSTGB
  6. Fred Nicely from the Council on State Taxation
  7. Joseph Henchman from the Tax Foundation
  8. Joe Crosby from MultiState Associates
  9. Steve Kranz from McDermott Will & Emery
  10. Leslie Fox from the International Council of Shopping Centers
  11. Joe Rinzel from the Retail Industry Leaders Association
  12. Rachelle Bernstein from NRF

For those of you interested in viewing the complete testimony from the January 9 hearing, NCSL has uploaded videos (Part 1 and Part 2) available on the NCSL YouTube Channel.

We know that many of you are, like us, a bit on the sales tax geeky side of commerce, so today we are proud to share the complete prepared testimony of one of those witnesses, Mr. Craig Johnson, Executive Director of the Streamlined Sales Tax Governing Board.

Statement of Craig Johnson at the National Conference of State Legislature’s Task Force on State and Local Taxation in New Orleans, LA on January 9, 2015:

Thank you Senator Althoff, Delegate Hixson, Representative Perone, and Members of the NCSL Task Force on State and Local Taxation for the invitation to talk to you today.

Introduction

My name is Craig Johnson and I am the Executive Director of the Streamlined Sales Tax Governing Board. I appreciate the opportunity to talk with you today about some of the concerns and questions I and others from the Streamlined Sales Tax Governing Board have regarding the hybrid-origin sourcing concept being discussed as a possible alternative to the Marketplace Fairness Act or similar legislation; and also provide you some information on what the Streamlined Sales Tax Governing Board member states have already done to successfully simplify the collection, reporting and remittance of sales tax on remote sales using destination-based sourcing.

I want to stress that the goal of the Streamlined Sales Tax Governing Board is to find a federal solution that is fair to all of the players involved – remote sellers, purchasers and the states – and that is not subject to easy manipulation by sellers or purchasers. We firmly believe that what we have done through the Streamlined Sales and Use Tax Agreement has proven that destination-based sourcing works because of the simplifications and uniformity requirements contained in the Streamlined Sales and Use Tax Agreement and the services offered by our Certified Service Providers.

Hybrid-Origin Sourcing

Although I and others from the Streamlined Sales Tax Governing Board have met several times with one or more members of the Judiciary Committee staff to try to obtain legislative language – even draft language – we have not been provided anything more detailed than this diagram. Therefore, I want to make it clear that no legislative language related to the hybrid-origin sourcing concept has been provided to us to date (January 9, 2015) and the comments that I am providing are based solely on the verbal descriptions and communications we have had with Judiciary Committee staff and the general concept as described in Mr. Christopher Cox’s testimony before the House Judiciary Committee in March of 2014.

Concerns and Questions Related to Hybrid-Origin Sourcing:

The Streamlined Sales Tax Governing Board has a number of concerns and unanswered questions with the respect to the hybrid-origin sourcing concept.

1. The Compact – Why would a state join the Compact?

States must join the Compact in order to obtain this collection authority. Sure the states would have the option of joining or not joining and yes they might obtain some additional revenue that goes uncollected today – but only from remote sellers in the other states that also choose to join the Compact. However, by joining the Compact, states are also subjecting their own in-state sellers to the requirements that they:

  1. Collect tax on transactions that today they are not required to collect on (which will also put them at a competitive disadvantage with those sellers that are not located in a Compact state and don’t have to collect tax),
  2. Gather and maintain the necessary information to identify which zip code and which state is entitled to the tax along with the amount of tax, and
  3. Complete a more complex return where they will be required to list out each zip code and/or state into which they made a sale along with the amount of tax collected for each of those zip codes and/or states. Every state that joins the Compact will also have to figure out how to process returns with this additional information and implement a system to get this revenue to the proper state or clearinghouse that would need to be created.

It is very unlikely that the five non sales tax states would join the Compact because by joining they would be supporting a true tax increase on their own residents by requiring them to pay sales tax on any purchases they make from remote sellers located in other Compact states, when today, those same purchasers do not legally owe any sales tax on those purchases. If they joined the Compact, they would also be requiring their own in-state sellers to either start collecting, accounting for, reporting and paying sales taxes on any remote sales made to purchasers located in other Compact states or report the necessary information to the purchaser’s state so the purchaser’s state could pursue collecting the use tax due. Based on this, does anyone really think any of the five non-sales tax states would voluntarily choose to join this Compact?

It is not just the non-sales tax states that would be raising taxes on their own residents under this concept. States with a low sales tax rate would also be subjecting their residents to a tax increase on any purchases they make from a remote seller located in any other Compact state that has a higher sales tax rate. The fact is that the only state’s residents that could be guaranteed to not end up with a tax increase on their remote purchases are those residents located in the highest rate state. Otherwise, any purchaser from any state that purchased a taxable product from a remote seller located in the highest rate state would see a true tax increase.

Let me explain this a little further. For example, if we just take state sales tax rates into account, California had the highest state sales tax rate as of January 1, 2014 at 7.5%. If all the states join the Compact, purchasers in EVERY state that make a purchase from a remote seller located in California would see a tax increase under hybrid-origin sourcing. At the same time, every California purchaser that made a purchase from a remote seller in any other state would see a tax decrease. Although this might sound good to the residents of California, this ultimately could result in California’s sales tax revenues declining as more and more purchasers figure out that they can save sales taxes by making purchases from remote sellers located in any other state and they only have to pay the lower rate – and California is prohibited from requiring them to pay any additional tax on the transaction. Is it right that the State of California’s sales and use tax revenues could be severely affected by the actions of the legislators in another state? Would California really want to join the Compact and risk seeing their sales tax revenues go down? Would California want to put their remote sellers at this competitive disadvantage? Do you really think the other states would join the Compact knowing that they are likely approving a true tax increase on all of their own residents?

Under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, purchasers in the same state would be required to pay the same amount of tax on purchases from remote sellers, regardless of where that remote seller is located. This would eliminate any true tax increase and allow each state to control its own sales and use tax revenues.

2. Sellers Will Move to Low or Non-Sales Tax States or States That Have Not Joined the Compact

Sellers know and understand the advantage they gain when they do not have to collect sales tax on a transaction but a competitor does. Likewise, many purchasers are willing to make their purchases while only looking for the lowest overall price – even if the only difference in the price is the sales tax. After all, unless I am buying something that I think I will need serviced after I purchase it, do I really care which seller I purchase it from? If ten vendors are selling the exact same product, most purchasers are going to look at which vendor they can get the product from for the lowest overall cost.

Under the hybrid-origin sourcing concept, any state that does not join the Compact will potentially become a tax haven for remote sellers – and purchasers will figure out who to buy from to legally avoid paying the tax. The end result of this over time will be that states that have joined the Compact or have a sales tax will likely see sellers making remote sales move to states that either have not joined the Compact (so they can continue to make their remote sales tax free) or to states with either no sales tax or very low sales taxes. Do we really want a system where remote sellers may choose which state to locate their business in based on whether or not they will have to collect sales tax on their remote sales?

Under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, the location of the seller would have no effect on the amount of tax the remote seller would be required to collect. This would eliminate the collection of sales tax from being a factor in a seller’s decision of where to locate its business.

3. Purchasers Will Buy Products from Remote Sellers Located in Other Compact States That Do Not Impose Sales Tax on the Particular Product They Are Looking For – Compact States Will Eventually See Their Sales Tax Revenues Decline

Under the hybrid-origin concept, remote sellers will apply the sales and use tax laws, rules and regulations that are in effect for their own home state, regardless of what the laws, rules and regulations are in the purchaser’s state. At the same time, states will be prohibited from imposing use tax on the purchase of a product by a purchaser located in their state from a remote seller. This type of system is vulnerable to manipulation by the purchasers. Let me give you a simple example.

Let’s assume that every state joins the Compact. State A currently does not impose sales tax on clothing, but State B does. Purchasers will figure out that if they buy clothing from a remote seller located in State A, the remote seller is not required to collect any sales tax on the transaction. But if they purchase the same clothing from a remote seller located in State B, they are required to pay the tax. Eventually everyone will know that if they purchase clothing from a remote seller in State A, as opposed to State B, they will not have to pay any sales (or use) tax. Although State A’s remote seller’s business will likely flourish, State B’s remote seller’s business will likely suffer. In addition, the states in which the purchasers are located will eventually see their sales tax revenues decline because the purchasers have figured out a way to avoid paying sales tax on clothing. Under extreme circumstances, this effectively puts one states sales tax revenues partially under the control of another state’s legislature which may choose to exempt a particular product.

Again, under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, purchasers would be required to pay the same amount of tax on purchases from remote sellers, regardless of whether the state in which that remote seller is located taxes or exempts the particular product.

4. Purchasers Will Be Required to Pay the Tax Based on the Seller’s Home State Even If the Purchaser is Located in a State that Does Not Impose Sales Tax

Under the hybrid-origin concept, purchasers are required to pay the tax that is imposed based on the seller’s home state laws, rules and regulations. This will result in purchasers located in states that exempt certain products being required to pay sales tax on their purchases from remote sellers of these products because the seller’s home state imposes tax on these products. This is another true tax increase that states that join the Compact would be approving.

Let’s assume again that every state has joined the Compact. A purchaser is located in State X and buys some clothing from a remote seller located in State Y. State Y imposes sales tax on clothing while State X does not. Although the purchaser is located in State X and the clothing is delivered to State X, under the hybrid-origin sourcing concept, this purchaser would be required to pay State Y’s sales tax on this transaction – when prior to State X joining the Compact, the purchaser would not have owed any tax to State X or State Y on this transaction. This is another example of a true tax increase that will result under the hybrid origin concept – but which would not occur under the Marketplace Fairness Act or similar destination-based sourcing legislation.

5. Multi-State Sellers Will Need to Have Multiple Sales Tax Calculation Systems in Place

Under the hybrid-origin sourcing concept, a seller that makes remote sales into another Compact member state would be required to apply its home state rules to those transactions – even though this may or may not even be the location from which the product is shipped. That same seller may also make sales to purchasers that are located in another Compact state in which the seller has nexus, but which is not its home state. For those transactions, the seller will have to have a system that applies the laws, rules and regulations of the state into which the product is shipped (i.e., destination-based sourcing rules). Finally, that same seller may also make remote sales to a purchaser that is located in a non-Compact state in which the seller does not have nexus or any physical presence and therefore is not required to collect any tax. Under the hybrid-origin sourcing concept, that seller will need to have multiple systems running parallel to account for each of the different scenarios the seller may encounter.

Under the under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, sellers will only need to have one system in place that consistently applies the laws, rules and regulations of the state to which the product is delivered to the purchaser.

The above questions and concerns are just some of the issues that the Streamlined Sales Tax Governing Board has with respect to the hybrid-origin sourcing concept based on discussions with members of the Judiciary Committee staff and without having seen any specific legislative language. Additional questions or concerns may arise once legislative language is provided.

Editor’s note: Soon after the January 9 NCSL hearing, a Hybrid-Origin Discussion Draft bill was made available on January 15, 2015

Has Streamlined Ever Considered Origin Based Sourcing?

Although the discussion today is focused primarily on the hybrid-origin sourcing concept, I do think it is important that you also know that in the early stages of the development of Streamlined, the state legislators, administrators, attorneys, accountants and business community members involved did weigh the pros and cons of an origin based sourcing regime. In fact, there is an issue paper on our website from back in 2002 that discusses the various sourcing options. During those discussions, it was recognized that theoretically an origin-based system is a more manageable obligation strictly from the seller’s perspective for many of the same reasons proponents of the hybrid-origin concept are using. But when the pros and cons were all taken into account, it was determined that destination-based sourcing was the way to go and was already being followed with respect to interstate sales. At that time, some of the disadvantages of using an origin-based system that were identified included the following:

  • Origin sourcing has the same effect as an export duty and has all the disadvantages that go with it;
  • States using origin based sourcing would be burdening their own businesses with a tax that will potentially put them at a competitive disadvantage with others in the remote sales market that are located in states that don’t follow origin sourcing; and
  • Origin based sourcing will affect the decision of where a business locates and states don’t want to get into a downward spiral competition with other states on this issue – especially those states where sales tax is a significant source of their state’s revenue.

When the Project thought about these disadvantages, it came to the conclusion that

…the only way to avoid these practical impediments in an origin system is to require all jurisdictions to impose an origin sales and use tax on generally the same base and at generally the same rate. In this circumstance, there is no substantial disparity that follows from the origin of the goods or services coming into the destination State, at least for domestic, but not international, commerce. This requirement flies in the face of our federal form of government, however. ‘Our Federalism’ allows each State to determine its own tax policy, including a policy of not taxing consumption through a sales and use tax at all.

Throughout the above discussion, I have noted several times how the Marketplace Fairness Act or similar destination-based sourcing legislation eliminates the issues that can occur under the hybrid-origin concept (i.e., tax increases, having multiple systems to account for different types of transactions, preventing sellers from locating in one state or another to take advantage of not having to collect sales tax, tax havens, etc.).

Streamlined currently has over half of the states with a sales tax as members of the Streamlined Sales Tax Governing Board. We have over 2,300 retailers that have voluntarily agreed to collect and remit the taxes in our member states, regardless of whether the seller has nexus or a physical presence in one or more of the member states. Based on the amounts reported by member states, these sellers have collected and remitted over $1.7 billion of sales tax since October 2005 that may otherwise have gone uncollected. Because of the simplifications, uniformity provisions, rate and jurisdiction databases and taxability matrices that member states are required to provide, many of these sellers have even chosen to calculate, collect, report and make the required remittances completely on their own. If collecting the taxes was as costly as some of the opponents of Streamlined make it out to be, these sellers would not stay registered and continue to calculate, collect and remit the taxes in those states where they are voluntarily doing so – they would unregister and only collect in the states where they had a legal obligation to collect. The technology is there and has made calculation, collection and remittance of sales tax much easier and less burdensome for sellers than in the past.

In addition, for those sellers that don’t want to do this on their own, Streamlined has Certified Service Providers that our member states compensate to provide the software and services necessary to integrate their software with the seller’s systems and that take care of the tax calculations, compile the data and prepare the returns, file the returns, make the necessary remittances to each of the states and handle any audits of the remote sellers on the transactions they processed in the member states where the seller is voluntarily collecting the tax. And best of all – this is provided at no charge to the sellers for all of the member states in which the seller is voluntarily collecting and remitting the tax. Destination-based sourcing can and does work and our organization is living proof of it.

Conclusion:

The Streamlined Sales Tax Governing Board continues through the cooperative effort of state legislators, state tax administrators, accountants, attorneys, and the business community, to look for ways to make sales and use tax systems simpler and easier to administer from both the state’s and business’ perspective – while at the same time protecting state sovereignty and making it fair for all parties – sellers, purchasers and the states.

Unfortunately, the hybrid-origin sourcing concept is an attempt to turn the tried and true destination-based sourcing hierarchy upside down and will result in a tax increase on millions of Americans. This alone will prevent most if not all states from joining the Compact that would be required to obtain collection authority and would result in Congressional authority that few if any states would adopt – leaving states no choice but to continue to find creative ways to be able to compel sellers to collect their sales tax. States don’t want to have to do this and I don’t believe any business wants this either.

I thank you again for the opportunity to discuss some of the Streamlined Sales Tax Governing Board’s concerns and questions with respect to the hybrid-origin sourcing concept and the opportunity to briefly describe some of the successes of the Streamlined Sales Tax Governing Board.


E-Fairness Solutions Make Online Sales Tax Quick and Easy

March 18, 2014

FYI: For those of you that didn’t already see it, the following Op-Ed piece by our CEO ran in Politico last week.

Online retailers are a tech-savvy bunch. They seem to know what we want, when we want it—and how to get it to us as quickly as possible. But a few of the same companies that have figured out how to target our shopping habits and ship products of all shapes and sizes around the country are now claiming that collecting sales tax is too hard.

These critics of e-fairness legislation have suggested that private-sector software already widely available for collecting sales tax is incomplete, complicated, and expensive. As an e-commerce entrepreneur for almost two decades, and as cofounder and CEO of TaxCloud, one of several online sales tax management services, I’d like to offer the truth about online sales tax.

The same technologies that enable smartphones also make sales tax calculation quick and easy: At TaxCloud, our software works directly with e-commerce platforms to calculate sales tax during each customer’s checkout. Everything needed to figure out the correct tax rate is already present during an online sale: the purchaser’s address, the sales price, and the type of item being purchased. That information is used to calculate the appropriate sales tax in a fraction of a second, just like shipping charges. Don’t be fooled—calculating sales tax is not laborious or burdensome. It’s really quite simple.

Collecting sales tax is not very expensive, either: Software and services that manage sales tax collection aren’t hard to find or expensive; in fact, in some states the service is free. Opponents of an e-fairness solution have made numerous misleading statements about the costs of software, presumably to preserve the preferential treatment they currently enjoy in the tax code. For instance, while publicly railing against the expense associated with online sales tax, eBay actually features a sales tax utility on its own website that costs $15 per month. And many third-party online storefronts or marketplaces can handle sales tax collection for their merchants for a very small fee. The cost of software is simply not an impediment for small online sellers.

Set it and forget it—why software makes it easy: It’s true that any sales tax system will need to know the type of item being purchased in order to determine if it’s tax-exempt. It’s important to remember that bricks-and-mortar sellers have always been required to assign tax classifications to their wares—this is not a new concept or obligation. And here again, the rhetoric does not match reality.

First, most small online stores tend to be specialists—they’re more likely to be selling one class of products than a wide range—and if that’s the case, all a seller needs to do is set their entire store to one tax category. Click—done. Second, even if a small online retailer sells many kinds of items, they would only need to assign categories to tax-exempt items, a small subset of most stores’ inventories. Click, click—done. E-commerce platforms are designed to assign large groups of items to tax categories, so no online seller will spend their time worrying about whether an item is tax-exempt or not. The bottom line is that once these categories are set, online retailers can focus on serving their customers—not on tax collection.

Tax returns aren’t filed by horse and buggy anymore. Despite the oft-repeated claim that compiling and filing sales tax returns with multiple states will create huge burdens and audit risks, the fact is that all of the existing sales tax management services can take this task off an online retailer’s hands entirely. Agreements with individual states let these services handle filing returns and remitting tax proceeds, without any effort from the retailer themselves. Most of these services also store all returns associated with your account, so accessing past records is a breeze.

Twenty years ago, opponents of remote or online sales tax collection were correct—collecting sales tax was rather laborious and time-consuming. But the same burst in technology that now allows consumers to shop anywhere, anytime, and have whatever they want delivered to their door in under twenty-four hours, also makes charging sales tax remarkably simple. For online stores, collecting sales tax is easier than configuring shipping charges. “Doom and gloom” predictions about the technology are misplaced—and any suggestion that sales tax management systems don’t already exist is simply wrong.

If Congress believes that online retailers should be exempt from the same laws and tax policies that every other business complies with, that is of course their right. But they shouldn’t make that determination based on the misguided and misleading rhetoric spun by those who stand to benefit from special treatment. And if Congress chooses to end the current disparity and treat all retailers equally, rest assured that the free market has already developed the tools and software necessary for both online sellers and brick-and-mortar retailers to thrive and grow in the decades ahead.


How sales tax management services handle audits

July 8, 2013

Congress is currently considering legislation to allow states to require online retailers to collect sales taxes. The bill that was passed by the Senate in May, the Marketplace Fairness Act, has raised concerns about how it could affect the way businesses are audited.

At TaxCloud, we handle not only sales tax calculation and collection but also filing and audits for many of our merchants. While we don’t know exactly what future legislation may say about audits, here’s what our experience dealing with audits has been like.

First, a little background: The 24 states that have designated us a Certified Service Provider (CSP) have agreed not to hold our merchants liable for any tax calculation errors, and in the event of an audit, these states deal first and primarily with us, not the business itself. So how does this work?

When one of our merchants is audited, the state begins by contacting us. We act as the intermediary between the state and the merchant. The state lets us know that it will be reviewing the merchant’s transactions and conducting an audit beginning on a particular date, and we in turn notify the seller.

The merchant doesn’t need to provide any additional information at this point, as long as we have complete transaction data. If there is transaction data that we don’t have, the merchant needs to supply it.

During the audit, the state sends any information or document requests directly to us. Occasionally we may need the seller’s help to respond. For instance, if an item was classified as tax-exempt but it’s not clear in the transaction records exactly what the item is, we’d ask the seller to provide a description of the item. The state contacts the merchant directly only if there is evidence of fraud.

If future legislation follows this pattern for audits, it’s good news for businesses: It means that states will go to sales tax management services for data that businesses have traditionally had to supply, so businesses won’t be faced with hosting an audit.


Editorials support Marketplace Fairness Act

April 30, 2013

The Marketplace Fairness Act has been all over the news in the last two weeks as it’s been debated on the Senate floor. The Senate is recessed for this week, but a vote on the bill is scheduled for Monday, May 6.

Most editorials on the topic have largely been in favor of online sales tax. Among the largest news outlets supporting it are:

(One notable exception to the general trend of support was the Wall Street Journal, whose April 17 editorial “The Internet sales tax rush” was effectively countered by the National Governors Association in a letter published on April 25.)

There have also been a lot of positive editorials from smaller local outlets, including:

If you’re interested in reading more, you’ll find a compilation of news articles on the Marketplace Fairness Act on marketplacefairness.org/news.


eBay and the small business exception

April 22, 2013

In an email Sunday to 40 million eBay users, eBay CEO John Donahoe urged them to oppose the Marketplace Fairness Act unless the small business exception, which exempts online retailers with less than $1 million in out-of-state sales from collecting sales tax, is raised to $10 million or 50 employees.

We’re all for making sure small online businesses don’t have to spend time or money dealing with sales tax (that’s why we created TaxCloud in the first place), but here are three reasons that raising the exemption threshold doesn’t make sense:

1. At the $1 million threshold, most online retailers are already exempt. Nationwide, fewer than 1000 online retailers* have more than $1 million in total sales. (If we consider only out-of-state sales, that figure is even lower.)

2. Collecting sales tax doesn’t require the resources of a large company. The Marketplace Fairness Act requires states to provide free sales tax software and services for online retailers, so online businesses wouldn’t need to spend anything to comply with the bill.

3. Most small online retailers already use e-commerce platforms, which can easily provide add-ons that handle sales tax, just as they provide for shipping—making sales tax collection easy for all their retailers at once. And we’d lay odds that once states can require online businesses to collect sales tax, that’s exactly what they’ll do.

By exempting online retailers with less than $1 million in out-of-state sales, the small business exception already does what it was designed to do: ensure that small online businesses are not burdened by online sales tax collection. But raising the exemption threshold to $10 million or 50 employees would be a mistake.

*According to Internet Retailer‘s Second 500 Guide, only the top 980 online retailers in the nation had over $1 million in sales in 2011.


Why online sales tax does NOT let states “tax beyond their borders”

April 22, 2013

One of the more common arguments we hear against online sales tax is that it would let states “tax beyond their borders.”

First, that statement is factually untrue—states can only tax state residents, and that wouldn’t change with online sales tax.

But online sales tax does mean that states could require out-of-state businesses to collect (not pay!) tax on sales to state residents. Some argue that this would be an expansion of state authority.

In fact, with online sales tax, states are simply taxing economic activity within the state—something they have always had the right to do.

And it’s worth noting that outside of sales tax, businesses that sell into a state are required to follow that states’ laws. For example, let’s say you live in California and purchase a camp stove from a company based in Minnesota. The camp stove is defective and causes a fire. The Minnesota company could be held liable for violating California product safety laws.

So why can’t states require out-of-state retailers to collect sales tax right now? Why do they need federal legislation, such as the Marketplace Fairness Act, to grant them that ability?

The answer goes back to a Supreme Court case, Quill v. North Dakota (1992). In that case, the court said that while it’s fine to require an out-of-state business that sells into the state to follow state law, it would be too difficult for out-of-state sellers to comply with state sales tax laws. In other words, Quill says that sales tax is an exception to the general rule that if you sell into a state, you have to abide by the state’s laws.

But with today’s technology, collecting sales tax is no longer difficult—so the reason behind the Quill decision no longer applies. And that means that there’s no reason for sales tax to be an exception to the rule.


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