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.


OH Gov. Kasich vetoes state online sales tax in favor of federal legislation

July 3, 2013
boehner-kasich1

Ohio Governor John Kasich (L) with Speaker of the House John Boehner

On Sunday, Ohio Governor John Kasich vetoed a line item in the state budget that would have required online sellers to collect sales tax from Ohio residents. His reasoning? He believes Congress needs to act on the issue first.

Governor Kasich isn’t the first lawmaker to voice that opinion—most state legislators seem to agree that the best scenario for everyone is that Congress, not states, revise the rules of online sales tax. But since Congress has yet to act, many states have begun instituting their own online sales tax laws like the one Governor Kasich vetoed.

State laws on the issue are, by necessity, more complex than a federal law would be, which can create problems for online businesses, particularly marketing affiliates.

Although we certainly sympathize with states that want to be able to enforce their own sales tax laws, we agree with Governor Kasich that Congress is the right place for online sales tax to be addressed. Here’s hoping the House of Representatives follows the lead of the Senate and takes it up soon.


Internet retailers will have to collect sales tax, with or without the Marketplace Fairness Act

May 23, 2013

Among opponents of the Marketplace Fairness Act, there is a sense that if they succeed in blocking the bill, online retailers won’t have to collect sales tax.

Not so.

First, online retailers already have to collect sales tax for any state where they have nexus, defined as a physical presence. Warehouses and offices definitely fit the requirement, but some states also require any retailer selling at a fair or convention to collect sales tax.

More importantly, states can pass their own online sales tax laws. While the Supreme Court’s ruling in Quill v. North Dakota says that states can only require retailers with nexus to collect sales tax, states have been pushing against the edges of that ruling for some time by redefining “nexus.”

Affiliate nexus laws have been perhaps states’ most popular tool. These laws redefine “nexus” to include any retailer with a marketing affiliate located in the state. New York famously used an affiliate nexus law to get Amazon to collect New York sales tax, and with the court’s March ruling that the law can stand, more and more states are following its lead—most recently Kansas and New Mexico. West Virginia has gone even further by saying that having an individual perform services or solicit business in the state also qualifies a retailer for nexus. What is meant by “services” and “solicit” has yet to be defined.

The use of a drop shipper can also trigger a requirement to collect sales tax. If a customer and drop shipper are located in the same state, sales tax must be collected on the purchase—no matter where the retailer is located.

States are hurting for funds, and they aren’t going to ignore the $11 billion in sales tax that a University of Tennessee study found is going uncollected. If federal legislation doesn’t pass, they will continue to enact their own laws, increasing the number of retailers with nexus in the state and who therefore must collect sales tax.

Unfortunately for retailers, that means a nationwide patchwork of sales tax laws to navigate, all with varying requirements and definitions.

The Marketplace Fairness Act, in contrast, requires states to simplify and standardize their sales tax rules, so it will be easier for a retailer to collect sales tax for multiple states. And with this legislation in place, states will have no reason to pass their own laws aimed at getting online retailers to collect sales tax.


Update: States eager for online sales tax action

February 7, 2013

In early December, we posted about states taking action on online sales tax collection.

As we noted then, states can’t do much without federal legislation, and support is growing in Congress for a bill that would give states full authority to require online retailers to collect sales tax.

But in the meantime, more states have started looking at what they can do.

Hawaii, Florida, and Michigan are all considering bills that would require an out-of-state retailer to collect sales tax if the retailer has an affiliate in the state.

Hawaii is also looking at adopting the Streamlined Sales and Use Tax Agreement, a set of guidelines that make collecting sales tax easy for retailers.

And while Virginia isn’t considering state action, it is counting on congressional action. The state’s proposed plan for transportation funding assumes that Congress will pass online sales tax legislation, allowing Virginia to collect hundreds of millions of dollars in uncollected sales tax.

States have already said that online purchases are subject to sales tax—but most of that sales tax goes uncollected. What they need now is federal legislation, and with each state-level bill or resolution, they’re sending Congress the clear message that the time to act is now. Let’s hope Congress is listening.


A return to state legislation for online sales tax

December 5, 2012

While the Marketplace Fairness Act continues to garner support in Congress, it remains in committee for the time being—which means that this holiday season, at least, the online sales tax loophole will stay open.

Without action from Congress on the issue of online sales tax, states are beginning to return to passing their own legislation. Two states, Michigan and Florida, have recently introduced bills that would require online retailers to collect sales tax.

Unfortunately, there’s not much states can do on their own—the Supreme Court said in 1967 and 1992 that states can’t require out-of-state retailers to collect sales tax. At the same time, though, the court said that Congress could and should decide the issue legislatively. That’s what the Marketplace Fairness Act is about.

We hope that all those state legislators, governors, local retailers, and others who are supporting state legislation will make their voices heard in DC, too. This is one instance where state action just isn’t enough. Congress needs to give states the right to decide for themselves whether they’ll require online retailers to collect sales tax.


Congratulations to Senator-elect Heitkamp!

November 26, 2012

Heidi Heitkamp

Congratulations to Heidi Heitkamp, who was just elected senator of North Dakota! Some of our readers may recognize her name: She was the North Dakota Tax Commissioner when the state brought suit against Quill Corp. in an attempt to require the catalog company to collect use tax on purchases made by North Dakota residents. The case famously went to the Supreme Court, which ruled that it would be too difficult for businesses to collect sales tax for states where they had no physical presence. But, equally important, the court also said that “the underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”

Four bills currently before Congress attempt to do just that and close the online sales tax loophole. We look forward to Senator-elect Heitkamp’s support on the issue!


Local sales tax on Election Day

November 2, 2012

Vote!With Election Day fast approaching, we’re seeing more and more articles on local sales tax measures that will appear on the ballot.

Any changes in sales tax have to be approved by voters, and in many places this year’s ballot includes a new sales tax to fund local initiatives. No one like paying taxes, of course, but these measures often receive a lot of local support—those who pay the tax are the same ones who benefit from the services it provides.

So what kinds of sales tax measures are appearing on ballots?

In Creek County, Oklahoma, a one-third-cent sales tax would buy much-needed equipment for the volunteer fire department.

In Rifle, Colorado, a three-quarter-cent sales tax would help pay for a new water treatment plant to replace the existing one, “which is old and in danger of failure.”

In Augusta, Kansas, a one-percent sales tax would pay for a new water line that would triple the amount of water carried to the city, without raising water rates or property taxes.

In Deridder, Louisiana, a quarter-cent sales tax would pay for renovations to the 98-year-old courthouse, which has a broken wheelchair lift and no elevator.

In Saratoga, California, a one-eighth-cent sales tax would fund law enforcement programs, emergency room services, and health insurance for low-income children.

In Jackson, Missouri, a sixth-cent sales tax would fund renovations to the public library.

In El Paso County, Colorado, a quarter of one percent sales tax would provide deputies for the understaffed sheriff’s department.

In Little Rock, Arkansas, a half-cent sales tax would pay for a highway improvement program that will create 40,000 jobs.

In Marion, Ohio, a 0.25% sales tax would allow for the rehiring of laid-off police and fire department personnel and help maintain city streets.

In Baldwin County, Alabama, a one-cent sales tax would go to local schools, which currently operate with less per-pupil spending than the state average.

All of these sales tax measures will appear on the ballot in November, to be either approved or rejected by local communities.

But if online retailers collected sales tax—which is already due on online purchases—these measures might be unnecessary.

States are losing out on $23 billion in uncollected sales tax every year—sales tax that shoppers owe but that goes unpaid because online retailers don’t have to collect it. That $23 billion would be supporting these kinds of projects and services without the need
for any increase in local sales tax.

Keeping fire and police departments staffed, maintaining roads, and supporting local schools without any tax increases—just more reasons to support online sales tax.


States increase online sales tax enforcement–which is why retailers should support federal legislation

August 31, 2012
Forbes

FedTax CEO David Campbell has a guest post on Forbes’ TaxGirl blog

Our CEO, David Campbell, has written a guest post for Forbes’ TaxGirl blog. The post tackles the provided topic “Is it fair to require online retailers to collect and remit state sales tax?” and focuses on the concerns of states without sales tax and why they should support federal online sales tax legislation. Take a look—we may be biased, but we think it’s a great read.

The post is particularly timely because of the recent sales tax news from California and Pennsylvania.

Both states are beginning to require online retailers, no matter where they’re located, to collect sales tax—even though no federal legislation granting them that power has been passed. States are no longer content to wait for federal legislation; they’ve begun taking online sales tax into their own hands.

As Mr. Campbell says in the post, this has particular importance for online retailers in non-sales-tax states because it means that even without federal legislation, it’s unlikely that they’ll be able to avoid collecting sales tax for long.

The LA Times has a great article on California’s move toward online sales tax. It includes this quote about increasing enforcement:

On Thursday, the tax agency announced new efforts that include spending $10 million over the next three fiscal years to hire nearly 100 tax specialists, auditors, lawyers and call-center operators. An additional 35 people will be needed in the fourth year, the board said recently.

These new workers are hired to identify and contact what the board estimates are “upwards of 2,000” out-of-state businesses that should be collecting sales tax under the new law and take action against any suspected scofflaws.

Pennsylvania, too, is increasing its enforcement of online sales tax collection, as this Internet Retailer article explains. Existing law says that any retailer with a physical location in the state must collect Pennsylvania sales tax. The state has said that this includes third-party retailers who use eBay or Amazon warehouses for order fulfillment, and beginning in September, it’s going to be requiring all online retailers to abide by this law.

With states already starting to require online sales tax collection, why the need for federal legislation?

Aside from legal issues regarding state authority over out-of-state businesses (which will have to be resolved either by Congress or in the courts), there’s a very good reason for all retailers to support federal online sales tax legislation: It would make states simplify their sales tax laws.

As Mr. Campbell says in his post:

While it isn’t possible to turn back the clock on online sales tax collection, it is possible to make it easy for sellers to collect sales tax. The Marketplace Fairness Act requires states to simplify and standardize their sales tax laws before they can require any out-of-state seller to collect sales tax. Online retailers in non-sales-tax states should be supporting this legislation: It’s the only way they can make sure that collecting sales tax won’t be too complicated.

Sales tax has always been due on online purchases. Online retailers haven’t had to collect sales tax in the past, but that loophole is about to end, one way or another.

Let’s end it the right way, by making sure states simplify and standardize their sales tax laws.


Arizona governor wants Congress to act on online sales tax collection

April 13, 2012
Governor Jan Brewer

Governor Jan Brewer wants Congress to act on online sales tax collection

An article in the Arizona Republic reveals that Arizona retailers are asking Governor Jan Brewer to level the playing field between bricks-and-mortar and online stores. A bill currently stalled in the Arizona legislature would require Amazon, which has four warehouses in the state, to collect sales tax on purchases made by Arizona residents.

The article says that Governor Brewer has refused to get involved, saying that this is an issue for the federal government to deal with.

While we fully support Arizona retailers and believe that online retailers should be collecting sales tax, we also agree with Governor Brewer (in fact, we sent her a letter to that effect).

Because of the limitations imposed by the Supreme Court cases Bellas Hess and Quill, only Congress can level the playing field for online and bricks-and-mortar retailers. We hope Governor Brewer will communicate her support for congressional action to Arizona Senators Kyl and McCain, ideally in advance of the rapidly approaching Senate Finance Committee hearing on April 25 (which is another blog post we’ve been meaning to get to).

By the way, we found a factual error in the Arizona Republic article: It erroneously says that Amazon sales are tax-free in Arizona. But like every other state with sales tax, Arizona applies sales tax to online purchases. If sales tax is not collected at the time of purchase (and online, it usually isn’t) the purchaser is supposed to report and pay the tax directly to the state.


Idaho governor supports online sales tax collection

April 12, 2012
Idaho Governor C.L. "Butch" Otter

Idaho Governor C.L. “Butch” Otter

According to this AP article, Idaho’s Governor Otter restated his support for online sales tax collection last Friday in an address given from his office.

Governor Otter joins many other lawmakers in voicing his support for online sales tax collection. And we’re pleased to note that despite the press’s characterization of the GOP as against online sales tax collection, Governor Otter is the latest in a long line of Republican politicians who publicly support it, including U.S. Senators Lamar Alexander (R-TN), Mike Enzi (R-WY), Roy Blunt (R-MO),  Bob Corker (R-TN) and John Boozman (R-AR)Tennessee Governor Bill HaslamMaine Governor Paul LePage, and many local lawmakers, such as Texas State Representative John Otto, Indiana State Senator Luke Kenley, and Florida State Senator Evelyn Lynn.

We also found the last two lines of the AP article interesting:

House Majority Leader Mike Moyle, who accompanied Otter as he addressed reporters on the Capitol’s second floor, reiterated his opposition Friday.
 
Moyle says Congress should take action first.

We’re thrilled to see that even those who oppose local action on online sales tax collection are not opposed to the basic principle—they just acknowledge that local action isn’t enough. Given the fact that this issue deals with interstate commerce, the (dormant) Commerce Clause applies, which means that only Congress is authorized to change the rules and limits established by the Supreme Court in Bellas Hess (1967) and Quill (1992). Those cases said that retailers without a physical presence in a state were not required to collect sales tax for that state (although they in no way suggested that tax would not be legitimately due).

Local and state laws cannot supersede that precedent. In order for their online sales tax collection laws to have any real effect, states need Congress to pass a law granting states the option to require online retailers to collect sales tax—this option simply isn’t available to them today (at least, not without significant legal challenges, as we have seen over the past few years). It’s for that reason, as well as many others, that we support the Marketplace Fairness Act.

Hopefully Governor Otter will channel his support and urge Idaho Senators Mike Crapo (R) and James Risch (D) to join the other fourteen bipartisan sponsors of the Marketplace Fairness Act and work to pass the bill this year.


Colorado’s online sales tax reporting requirements law finally killed

April 7, 2012

A federal judge has finally issued a permanent injunction on Colorado’s 2010 online sales tax reporting requirements law, which called for all online retailers to report purchases made by Colorado residents to the state’s Department of Revenue. A temporary injunction against the law was issued last year just before the reporting requirements would have gone into effect.

In his ruling, Judge Robert E. Blackburn looks at the precedent set by the 1992 Supreme Court case Quill v. North Dakota, which mandated that out-of-state retailers did not have to collect sales tax even as it recommended that Congress address the issue—which, of course, it has yet to do.

Blackburn writes:

Quill puts states like Colorado in a difficult position. The state cannot require out-of-state retailers, retailers with no physical presence in the state, to collect and remit sales tax on sales those retailers make to residents of Colorado. Residents who make purchases from those retailers are obligated to pay use tax on those purchases, but enforcing the use tax is significantly more difficult than enforcing the sales tax. Seeking to enhance enforcement of the use tax on those who make purchases from out-of-state retailers, a state understandably looks to the out-of-state retailers for key information that can enhance enforcement. However, if the state has a mandatory sales tax system, as does Colorado, enforcing a reporting requirement on out-of-state retailers will, by definition, discriminate against the out-of-state retailers by imposing unique burdens on those retailers. Such a system imposes a differential burden on out-of-state retailers because the different burden is imposed precisely because the retailer is an out-of-state retailer entitled to the protection of Quill. Quill creates the in-state versus out-of-state distinction, and the dormant Commerce Clause prohibits differential treatment based on that distinction. Only a change in the law by the Supreme Court or action by Congress can change this situation. Quill, 504 U.S. at 318 (“Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”) (emphasis ours)

It’s worth repeating: “Only a change in the law by the Supreme Court or action by Congress can change this situation.”

Our readers may be surprised, given our support of states’ efforts for online sales tax collection in general, that we agree with Judge Blackburn—on his overall ruling, the fact that Quill makes the current situation difficult for states, and his assertion that only federal action, not state, can remedy the situation.

State after state has tried to increase the collection of sales tax on online purchases, but only a federal law, like the Marketplace Fairness Act, can overcome the limits set by Quill—or, more precisely, can exercise the interstate commerce authority reserved for Congress via the (dormant) Commerce Clause.

One other interesting point: Colorado doesn’t include a line on its income tax return form for reporting and remitting sales tax on online purchases. The reason given? That “the amount of tax collected did not justify the printing expense.” We have to think that, while that may have been true in 1974, it wouldn’t be true anymore, and it does seem like a reasonable measure to impose until Congress acts on online sales tax collection.

But the inclusion of this fact in the ruling leads us to another question. The ruling says that “there are at least three reasonable nondiscriminatory alternatives” to reporting requirements that could also increase the collection of sales tax on online purchases: the line on income tax returns, increased auditing of businesses, and consumer education and notification programs aimed at increasing compliance.

What about the other states that have already implemented these, that include the line on income tax returns, have increased business audits, and created consumer education programs—and still have not seen satisfactory compliance with its sales tax laws? Would these states be permitted to implement reporting requirements?

Other ideas in the ruling make us think not, but better legal minds than ours may be tempted to try. We still oppose reporting requirements, primarily because they are an invasion of consumer privacy, but we wouldn’t be surprised if another state, fed up with lack of action by Congress, decides to try this approach.

The best course of action, as we have been arguing for a long time, is for Congress to pass federal legislation allowing states to require online retailers to collect sales tax, for many good reasons.


Georgia legislature passes online sales tax law

April 4, 2012

Late last week, Georgia’s state legislature passed a law requiring online retailers with affiliates in the state to collect sales tax. It will next go to the governor, who has said he will sign it. Georgia is a member of the Streamlined Sales and Use Tax Agreement, which means they have already simplified their sales tax laws to make it easier for retailers to collect sales tax.

When other states have passed these kinds of affiliate nexus laws, online retailers have responded by simply ending their affiliate relationships in the state. These laws end up hurting small businesses that rely on affiliate marketing income and do not bring in any additional sales tax revenue.

Interestingly, the National Conference of State Legislatures opposed the legislation, but not because they don’t support online sales tax collection:

The National Conference of State Legislatures opposes such legislation at the state level, and is lobbying for a federal law.

“States want to go after this money that’s owed to them, which is understandable,” Behlke said. However, he said, unless federal legislation is passed that gives states greater authority to collect the tax, states will continue to miss out on billions in revenue.

The NCSL is correct, federal legislation is best—and as state after state passes this kind of law (Georgia is the fourteenth to introduce such legislation), they send a clear statement to Congress that a federal law is desperately wanted and needed.

This quote from the president of the Georgia Retail Association neatly summarizes a few of the reasons so many states and retail associations favor online sales tax collection:

“The reality is that brick-and-mortar stores have a responsibility of collecting sales tax from their customers at the point of sale,” said Rick McAllister, president of the Georgia Retail Association and a proponent of the tax. “With the evolution of the Internet, most of our members who have Internet sales collect tax on their sites, but there are some who don’t. It’s not a new tax. What we’re asking folks to do is collect the sales tax from their customers and remit it to the state of Georgia just like all the brick and mortar stores do.”

In other words, bricks-and-mortar stores are collecting sales tax while online stores are not, creating an inequity that favors online store over their Main Street counterparts. And he makes an important point: Sales tax on online purchases already exists. If the online retailer doesn’t collect it, the purchaser is supposed to remit the tax on their own.

This fact isn’t well-known, as this quote from a Georgia shopper reveals:

Even when the rule takes effect, Hayes said she doubts it will deter her from shopping on the Internet, since she’s mainly in it for convenience.

“If I wanted to save money, I’d probably just go to a bricks and mortar establishment,” she said. “I’m paying so it shows up at my doorstep. If there’s an extra surcharge, I probably won’t even notice that I should be upset about it.”

But the fact is, this isn’t an extra surcharge. Shoppers are already supposed to pay sales tax whether they buy online or in local stores. With this law, that sales tax will simply be collected by retailers, taking the burden of calculating and remitting off shoppers.

Because so few know of this law and even fewer abide by it, states are losing a vast amount of revenue at a time when few can afford it. According to a report drafted by the Special Council on Tax Reform and Fairness for Georgia, the lack of online sales tax collection will cost the state $410 million in 2012 alone.

For all these reasons—because the current situation hurts Main Street retailers; because states are losing hundreds of millions in revenue; because a tax that is due is simply going unpaid—we expect to see more and more states join Georgia and the thirteen other states that are calling for online sales tax collection, until a federal law is finally passed.

Georgia’s Governor Deal should follow Maine’s Governor LePage’s recent example and reach out to Senators Johnny Isakson (R) and Saxby Chambliss (R) to urge them to support the Marketplace Fairness Act (S.1832).


eBay relaxing opposition to the Marketplace Fairness Act?

March 29, 2012

It all started when Maine’s Governor Paul LePage sent a letter to Maine’s Senators Snow and Collins, urging them to support the Marketplace Fairness Act (S.1832).

Then, we learned (from an article by Jonathan Riskind, Washington Bureau Chief for MaineToday Media) that eBay had written a response letter to Governor LePage. Yesterday, eBay announced/confirmed this letter.

We are happy to note that eBay did not write in opposition to the Marketplace Fairness Act but instead simply confirmed that small business retailers should be adequately protected from new burdens (which is already provided for in the bill).

We have taken a moment to review eBay’s letter carefully and noticed something odd. Mr. Riskind’s article cites the eBay letter:

eBay notes there are a variety of internet sales tax bills pending in Congress and says it supports a “robust” exemption set by the U.S. Small Business Administration, which will “be able to most accurately measure which businesses need protection the most.”

We could not find this quote in eBay’s Letter.

We also wrote a letter to Governor LePage regarding his support of the Marketplace Fairness Act and eBay’s reported objections to it, which we sent yesterday (before eBay released their letter).


Amazon makes a deal with Indiana. Who’s next?

January 24, 2012

Indiana has been a member of the Streamlined Sales and Use Tax Agreement (SSUTA) since 2005, so we here at FedTax were surprised when we heard that affiliate nexus legislation (sometimes called “Amazon tax”) was being proposed there (H.B. 1119). Regular readers of this blog know that affiliate nexus laws expand the definition of nexus to include affiliate marketers— locally based websites that provide marketing for out-of-state merchants. Affiliate nexus laws are generally ineffective because, time, and time, and time,  and time again the impacted e-commerce retailers have demonstrated their willingness to sever ties with their in-state affiliates so they can avoid being singled-out as the only remote retailers being required to collect.

We were very pleased when we learned this was not going to happen in Indiana.  Governor Mitch Daniels announced that Amazon has agreed to begin collecting sales tax in Indiana in 2014—or even sooner if Congress enacts guiding legislation, like the Marketplace Fairness Act  (S.1832). In exchange, the Indiana legislature will not advance the proposed affiliate nexus legislation. As an additional benefit, the Indiana-based Simon Property Group (the largest shopping mall owner in the U.S.)  has agreed to suspend its lawsuit against the Indiana Department of Revenue over its failure to require Amazon to collect sales tax despite its three distribution warehouses in the state. Governor Daniels said that Indiana is the 4th state with such a tax collection agreement with Amazon, joining California, Tennessee, and South Carolina.

Now even more states are considering similar legislation. We do not intend to hatch a conspiracy theory, but some could draw the conclusion that these bills are being used as an indirect method of “requesting” that Amazon open distribution centers in their state. We hope Congress will act soon to end all this craziness.