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Los Angeles Times: California legislation would tighten rules on Internet sales tax

This comprehensive LA Times article by Marc Lifsher covers all sides of the internet sales tax debate—the estimated $1.7  billion in uncollected sales tax for California, the concerns of brick-and-mortar retailers who lose sales to online retailers, and the worries of California-based websites that will lose revenue if Amazon (and others) pull affiliate relationships from the state if AB 153, the affiliate nexus legislation, passes. The Main Street Fairness Act, which will be introduced in Congress in the coming weeks, would give California a way to collect this revenue without incurring the collateral damage to local website operators that affiliate nexus laws can cause.

This well-written article on the Oxford University Press blog gives a compelling view of the legal and practical problems with the affiliate nexus laws that have been passed (or are being considered) in many states.  The author covers the practical and legal drawbacks to these laws, makes a compelling argument that the affiliate nexus model is not sustainable, and ends with a call to Congress to solve the problem once and for all with sound federal legislation.

We understand why states are enacting these laws—to recoup the sales tax revenue that has been disappearing as shoppers turn to internet retailers. However, we believe this approach creates more problems than it solves (as the article explains), and there is a better solution: the Main Street Fairness Act. Not only does it avoid the problems of affiliate nexus legislation, it also levels the playing field between local retailers that have to collect sales tax and online retailers that don’t.

Florida representative Michelle Rehwinkel Vasilinda has introduced HB 455, legislation to conform to the Streamlined Sales and Use Tax Agreement (SSUTA).  The legislation would take effect on January 1, 2012.  This is great news for the Streamlined effort, Florida being one of the larger states.

If passed, Florida’s action on Streamlined will help the state recover an estimated $1.5 billion in uncollected sales tax in 2012.  More information on that estimate—and the estimated amounts of uncollected sales tax for other states—can be found at the National Conference of State Legislators (NCSL) website.

So, a summary of all of the activity related to collecting the sales tax due on internet purchases:

States that have introduced new Streamlined legislation this year:  Alabama, Connecticut, Idaho, Missouri, and Florida

States that have introduced affiliate nexus legislation this year:  Illinois, California, Connecticut, New Mexico, and Mississippi

Twenty-four states are already members of SSUTA.  Six more states have SSUTA legislation under consideration.  Five more (I’m not double-counting Connecticut) are considering legislation to take a different approach to collecting tax on internet sales.

Three more states are meeting resistance to their existing efforts to collect taxes using a non-Streamlined approach (New York is in litigation with Amazon and Overstock over its affiliate law; North Carolina lost a judicial decision over receiving detailed purchase information from Amazon; and Colorado was recently prevented from enforcing its notification and reporting laws while a lawsuit by Amazon and Overstock moves forward).

Seems like we have reached a tipping point—enough states are jumping into the fray to make instituting Streamlined the most sensible solution to the problem of uncollected sales tax.

A federal judge has granted a request to block Colorado’s sales tax reporting and notification law. That law,  HB 1193, covers purchases made from out-of-state retailers. It states that online retailers with over $100,000 in sales to Colorado customers must notify Colorado consumers that use tax is due on their out-of-state purchases. The notice is to be posted on the retailer’s website and on invoices. The law also requires out-of-state retailers that have over $1 million in annual sales into Colorado to mail a 1099-like notice at year-end to consumers who have spent more than $500 at the retailer.

The injunction granted yesterday was in response to a request by the Direct Marketing Association to have the law suspended while they try to get it overturned. This article from the Colorado Statesman, dated July 9, 2010, explains the basis for the DMA’s lawsuit and highlights some of the privacy concerns raised by Colorado’s law.

The Streamlined Sales and Use Tax Agreement (SSUTA) would eliminate the need for states to pass disparate laws, such as this one, that invite litigation. Instead, a federal law such as the Main Street Fairness Act would enable all states that conform to SSUTA to simply require out-of-state retailers to collect and remit the sales tax that is already due on purchases by in-state consumers.

A host of articles today highlight the taxes that go uncollected when consumers shop online:

Indiana – Department of Revenue is advising locals to ‘check those receipts’ to see if sales tax was collected, and if not, to keep track and report it at year-end.

Florida – an unfairly titled article covers efforts by a State Legislator is pushing for Florida to join the Streamlined effort.

Massachusetts – a call for fairness to Main Street Merchants (though the article offers a misguided ‘Origin-based’ solution…)

Wisconsin – article calls attention to the estimated $150 million in uncollected Wisconsin sales tax each year.

National – NBC interview with Maureen Riehl of the National Retail Federation sums up the issues and the growing momentum towards passage of the Main Street Fairness Act now pending before Congress.

We’ll try to keep you updated on this blog with the deluge of articles.  Stay tuned!

A federal judge has blocked North Carolina’s attempt to force Amazon to turn over customer names and addresses to state tax officials. The judge found that, because North Carolina’s Department of Revenue already possessed information on specific items purchased, turning over customer names and addresses would violate Amazon’s customers’ First Amendment right to freedom of expression.

Clearly this is a big win for consumer privacy. The court agreed with Amazon’s claim that the Department of Revenue’s request for all information on Amazon’s sales to North Carolina residents violates the First Amendment, as well as the Video Privacy Protection Act.

However, the decision also upholds North Carolina’s right to compel Amazon to remit sales tax—so the relief it offers to Amazon is limited. As the judge wrote, the ruling “cannot be interpreted [as granting] Amazon a free pass from complying with any valid tax law of North Carolina or elsewhere.” In addition, the court’s decision leaves the Department of Revenue with the ability to make similar future requests for information from Amazon or other out-of-state retailers.

This ruling could add significant momentum to the movement already underway to enact federal legislation—the Main Street Fairness Act (HR 5660)—that would allow states to require out-of-state retailers to collect sales tax. Federal legislation is becoming necessary to curb the growing complexity of state-by-state efforts to collect sales and use taxes. Recent state efforts include: Colorado legislation that requires some out-of-state retailers to report consumer purchases to the state, Texas’s recent assessment to Amazon for $269 million in uncollected sales tax, and notices that Alabama sent to some consumers in September for use tax owed on online purchases.

The Main Street Fairness Act would require all merchants to collect sales tax based upon the simplification and streamlining measures already established by 44 states. For merchants concerned about the burden of collecting sales tax in every tax jurisdiction across the country, our TaxCloud service is certified to meet the requirements of the Streamlined Sales Tax initiative.

We have designed TaxCloud to be easy-to-implement, and it’s completely free for all merchants. It enables any merchant to immediately begin calculating and collecting accurate local sales tax for every jurisdiction in the country. In addition, for the 23 current Streamlined Sales Tax states, TaxCloud can also prepare sales tax returns and automatically remit sales tax proceeds without any additional effort by the merchant.

North Carolina’s motivation in pursuing the collection of sales tax is clear. According to the National Conference of State Legislatures, the state will lose over $160 million in uncollected sales tax revenue on e-commerce sales in 2010, a number that is expected to rise as customers continue to buy more goods and services online.

As the majority of states face budget shortfalls in 2011, we expect more and more attempts by states to collect the sales tax due on online purchases. Federal legislation, in conjunction with the technology available for free from FedTax.net, would make it unnecessary for states to act individually to collect much-needed sales tax revenue.

As noted in this article, the state of Texas has billed Amazon for $269 million in uncollected sales tax. The claim is based on the location in Texas of a distribution facility owned by an Amazon subsidiary.  This is an example of states stepping up efforts to collect some of the estimated $20 billion or so in sales tax that goes uncollected on online sales.  The enactment of the Main Street Fairness Act would make collection of sales tax consistent across states, eliminating the need for actions by individual states.

It seems like there has been a few news stories recently about Use Tax – and how many (most?) consumers have no idea that it exists.  This video on MyFox Orlando clearly illustrates the point.  The segment points out the millions in revenue to the State of Florida that is lost due to under-reported Use Tax.  Florida has a voluntary reporting program that allows consumers to catch up on Use Tax payments without penalty.  Expect to see more stories like this, as 46 states had budget shortfalls in 2010.

An article titled “The States Strike Back” on WebCPA.com outlines several ways that states are intensifying efforts to collect sales tax. This includes extending the definition of nexus:  In addition to New York, North Carolina and Rhode Island with explicit nexus laws, “14 additional states [have] said that they would find nexus for in-state affiliates [which] suggests that these jurisdictions may believe that the Amazon law approach fits within their sales tax nexus policy.”  the article also discusses Colorado’s approach of requiring notification by remote vendors of the obligation to pay use tax, and the requirement that vendors report total annual sales by each purchaser to both the purchaser and the state.

All of the above tactics are in response to state budget shortfalls —- a whopping 46 states had shortfalls when adopting budgets for the current fiscal year.

Clearly, state support for passage of Main Street Fairness is growing.  And, as we continue to point out, the adoption of MSFA would head off continued growth of a patchwork of state laws and enforcement efforts.