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.

Small business owners testify in Texas

March 29, 2011
The Statesman: Small business owners testify in Texas

The Statesman: Small business owners testify in Texas

An article in The Statesman (Texas) describes a meeting of the Texas House Ways and Means Committee, which is considering how best to deal with the issue of online sales tax—a particularly sensitive issue in the state because of Amazon’s threat to close its warehouse there rather than collect sales tax for Texas, as it is required to if it has a physical presence in the state.

What we found most interesting was the testimony of small business owners before the committee:

Gregg Burger , general manager at Precision Camera in Austin, said his store last year had $17 million in sales and collected $1.5 million in sales tax. He estimated that Precision Camera loses about $5 million per year in sales to online retailers.

This is the first time we’ve seen a number that indicates just how much money local retailers are losing to online retailers, and it’s not a small number—it works out to about 30% of the store’s annual sales.

The testimony got emotional at times, showing just how important the issue is to local small business owners:

“We are losing tons and tons of business out of the state,” Burger said. “We are losing millions of dollars by letting out-of-state competitors take our jobs and our money. We want to collect the tax. Please, please, let’s get this through.”

The article also describes a pending bill that would “amend the state tax code to say that a company can’t be classified as a retailer required to collect sales tax if it, or a subsidiary, operates or uses “only a fulfillment center … or a computer server” in Texas. Clearly, it’s intended to allow Amazon to keep its fulfillment center in Texas open without having to collect sales tax for Texas.

But the bill contradicts the Supreme Court ruling that says a retailer with a physical presence in a state must collect sales tax for that state. Should the it pass, we predict that we’ll see court challenges and appeals that will prevent it from being enacted.

We also found a quote by the author of the bill, Rep. Linda Harper-Brown, interesting. The article quotes her as saying that “she is working ‘to make sure there’s balance in the bill to avoid hurting “mom-and-pop” businesses but not create more problems for Amazon.’ ”

By saying she’s working to avoid hurting mom-and-pop businesses with her bill, she’s implicitly acknowledging that they are hurt when online retailers avoid collecting sales tax—if they weren’t, she wouldn’t have to work to avoid hurting them.

We’re glad to see that word is getting out: when online retailers don’t have to collect sales tax, it hurts local retailers who do. Let’s level the playing field and require all retailers, online and off, to collect sales tax.