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.


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!


“Fair Is Fair”: A legal perspective on the Marketplace Acts

September 11, 2012

The latest issue of Shopping Center Legal Update, a “legal journal for the shopping center industry,” has an interesting article on the Marketplace Fairness Act, Marketplace Equity Act, and Main Street Fairness Act—the three bills currently before Congress that would each allow states to require online retailers to collect sales tax.

In the article, Brian D. Huben, a partner at the LA law firm Katten Muchin Rosenman LLP, provides a legal perspective on online sales tax collection. We were particularly interested in his analysis of the Supreme Court case Quill Corp. v. North Dakota (1992). That case is responsible for the current rules about sales tax that govern online shopping, and this is the first place we’ve seen its details explained by a legal expert.

We found this part of the article, which quotes the dissenting opinion in Quill, particularly enlightening:

Some say that the past is prologue. Justice Byron Raymond “Whizzer” White, who dissented in Quill, presciently noted that “an out-of-state seller in a neighboring State could be the dominant business in the putative taxing State, creating the greatest infrastructure burdens and undercutting the State’s home companies by its comparative price advantage in selling products free of use taxes, and yet not have to collect such taxes if it lacks a physical presence in the taxing State.” Quill Corp., 504 U.S. at 328 – 329. While the stakes in Quill were decidedly smaller, the $23 billion in uncollected sales and use tax revenue cannot be ignored.

While fairly brief, this article is a great source for those interested in today’s online sales tax rules, how they came to be, and why some are arguing for change.


FedTax Statement Submitted for the Record of the Senate Finance Committee (in support of Marketplace Fairness Act)

April 26, 2012

[Download PDF of FedTax Statement]

Statement Submitted for the Record to

The United States Senate Committee on Finance

Full Committee Hearing

Tax Reform and What It Means for

State and Local Tax and Fiscal Policy

April 25, 2012

 Dirksen Senate Office Building

Washington, DC 20510-6200

Attn:  Editorial and Document Section

Rm. SD-219

Statement submitted by

R. David L. Campbell[i]

Chief Executive Officer

and

Joan Wagnon[ii]

Executive Vice President

The Federal Tax Authority, LLC

162 East Avenue

Norwalk, CT. 06851-5715

Alexander Hamilton wrote in The Federalist in 1788 that “individual States should possess an independent and uncontrollable authority to raise their own revenues for the support of their own wants.”

Today the discussion about state sovereignty over matters of taxation continues unabated. State revenue directors have seen firsthand how the actions of the federal government have affected state and local revenues. Members of Congress are increasingly bombarded by requests for action because state laws are restrictive to business or seen as unfair. There are any numbers of examples where congressional action has been beneficial or harmful to states.

But the issue that has been most devastating to state and local government has resulted from Congressional inaction, rather than action: the failure of Congress to overturn Quill v North Dakota.[iii] 

The Marketplace Fairness Act (MFA), S. 1832, sponsored by a bipartisan group of senators (Enzi, Durbin, Alexander, et. al.) is a good solution to the revenue problems of states, but more importantly, it gives states a better mechanism than they have now to collect the taxes they already levy.[iv]

The MFA also corrects a growing imbalance between groups of retailers. Under the current court ruling, tax is collected on some sales and not on other sales of the exact same items. Why should tax be collected on a book or camera purchased from a local business and not on an identical item purchased from a mail order or internet business?

Remote sales are growing at double digit rates.[v] However, states’ inability to collect sales tax on these sales results in the erosion of the states’ tax bases. Certainly this unfairness is not the hallmark of good tax policy! Congress is creating winners and losers among the retail community by its inaction.

Opponents cite two specific reasons for allowing this unfair situation to continue: a) that remote collection would be overly burdensome and complex, and b) that any systems necessary for remote collection would be prohibitively costly. This testimony will provide technical information for Congress to consider when evaluating those arguments.

I.       The Complexity Argument

Technology has advanced considerably since the 1967 and 1992 Supreme Court rulings that created the current sales tax situation. Even the more recent of these, Quill, occurred before the first graphical browser was invented, before most homes had internet connections, and long before e-commerce forever changed the retail landscape. Today, forty-five years after Bellas Hess and twenty years after Quill, online marketplaces and auction sites easily manage millions of items for sale at any given moment.

Today, keeping track of a few thousand local tax rates and filing requirements is not an insurmountable technical, administrative, or financial burden. TaxCloud, the sales tax management system created by FedTax, proves this point by calculating and collecting sales tax on any purchase for any tax jurisdiction in the United States in less than one second. The service is free to all retailers.

The technologies necessary to create such a system are not new; they are well-established. In fact, they are currently being used throughout e-commerce. They are Application Programming Interfaces and Web Services. An Application Programming Interface (API) allows dissimilar and unrelated systems to communicate with each other using pre-established syntax and structure. Web Services allow APIs to be used for machine-to-machine interactions over the internet. Both are now commonly used in e-commerce—for example, in real-time-shipping, which allows a retailer to provide its customers with accurate, real-time quotes for shipping costs based on at least five variables, including weight, size, delivery speed, origin, and destination. Often customers can even compare shipping costs among multiple shippers.

With APIs, Web Services, and other technological advances of the past twenty years, it is now possible for remote retailers to easily keep track of every state’s tax laws. 

To minimize or completely eliminate the undue burdens cited in Bellas Hess and Quill, more than half of the states with sales tax have worked together for twelve years to create the Streamlined Sales and Use Tax Agreement (SSUTA). These states provide free rates and boundaries databases for all of their respective taxing jurisdictions, and regularly issue updates when rules, rates, or boundaries change. In addition these states also certify and pay for software and service providers to manage sales tax compliance on behalf of retailers.[vi] The Marketplace Fairness Act requires that any states seeking remote collection authority shall comply with SSUTA or provide comparable rates and boundaries information as well as certified software and services that retailers can rely upon to achieve compliance with minimal burden.[vii]

Ironically, those who argue most strenuously that remote collection would be too complex are a few large online businesses that already rely on these same technologies every day, in every transaction. The plain fact is that online retailers operate the largest marketplaces in the world by relying on technology to simplify and automate a host of historically burdensome chores, including payment automation, location-specific marketing, personalized recommendations, and even Duties and Value Added Tax management for foreign governments.

II.        The Costs-of-Compliance or Undue Burden Argument

Opponents also argue that even if technology can solve the technical burden of keeping track of rates, jurisdictions, and filing complexities, such software would be prohibitively costly, particularly for small businesses. TaxCloud is provided to retailers at no cost—so the argument that such software would be prohibitively costly should be flatly disregarded. However, the costs-of-compliance argument also maintains that even if the software is free, businesses will still be burdened with the cost of integrating such software into their existing systems.

This line of argument ignores the reality that all but the very largest retailers rely upon pre-written software and/or online hosted platforms for e-commerce and order management. Retailers rely upon these systems to avoid the costs of developing, managing, and maintaining such systems on their own, costs that are magnified by the changing nature of e-commerce. It is no secret that e-commerce is constantly changing to respond to evolving cyber-crime threats, payments and security industry best-practices, and, yes, legislative requirements. When their retailer clients need to collect sales tax, platform vendors will provide ways for them to do so, embedded within the platforms that retailers already use.

E-commerce platform vendors are intensely competitive and focused; they take pride in not only complying with evolving requirements but often surpassing them, occasionally with stunning results. For example, much of the cloud computing infrastructure now transforming every corner of the technology sector can be traced to several of the largest e-commerce companies adapting to comply with the Sarbanes Oxley Act of 2002. Most platforms already provide basic sales tax management features for their clients. Upon enactment of MFA, these existing systems will quickly be adapted to ensure compliance.

To conclude, modern technology has made it easy for retailers to collect sales tax for any state in the U.S. TaxCloud enables retailers of any size to easily collect sales tax and comply with the provisions of The Marketplace Fairness Act—for free. More information is available at TaxCloud.net.

And in addition to TaxCloud, five other companies are certified by the Streamlined Sales Tax Governing Board and ready to assist when Congress authorizes collection—and no doubt hundreds more will emerge soon after legislation is passed, because the free-market system will provide the incentive for entrepreneurs and innovators to develop these products.

Please don’t wait to enact the Marketplace Fairness Act until all the parts of tax reform are in place. Passing this one bill can be the foundation for future reform as well as provide great benefit to both state and local governments. It also benefits brick and mortar retailers. Creating the same tax collection system for retailers whether they sell online or in a store is only fair.

/R. David L. Campbell/
R. David L. Campbell
Chief Executive Officer
/Joan Wagnon/
Joan Wagnon
Executive Vice President

[Download PDF of FedTax Senate Finance Committee Statement – 4/25/2012]


[i] David Campbell, Chief Executive Officer of The Federal Tax Authority (FedTax), founded the company in 2008. FedTax is a Washington State Limited Liability Company with operations in Washington, Connecticut, and Kansas.  Its management team includes highly experienced professionals who have been directly involved in building some of the most recognizable brands in e-commerce, including MasterCard, Google, WebMD, Microsoft, Expedia, and American Express.

[ii] Joan Wagnon served as Secretary of Revenue in Kansas from 2003 to 2011. She also chaired the Streamlined Sales Tax Governing Board in 2008-9 and the Multistate Tax Commission from 2006 to 2008. She served on the Board of Directors of the Federation of Tax Administrators for 8 years before joining FedTax to work toward the passage of federal legislation granting states’ collection authority over remote sales.

[iii] The notion that out-of-state retailers would find it overly burdensome to keep track of every state’s sales tax rules can be traced directly to the 1967 Supreme Court ruling in National Bellas Hess v. Illinois Department of Revenue. In its majority opinion, the court ruled thatthe many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions” (emphasis added).

In 1992, the matter of remote sales tax collection came before the Supreme Court again in Quill v. North Dakota. This time, the court reaffirmed the earlier Bellas Hess decision by a ruling of 8 to 1, primarily on the basis of stare decisis. The ruling went on to state, “[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”

FedTax frequently cites the earlier Bellas Hess quote because it summarizes the ruling’s basis in complexity and burden, which has rippled forward to the present day and created a tidal wave of unintended consequences. This ruling has shielded all out-of-state retailers from the obligation to collect sales tax, based purely on the notion that it would place too much of a burden on businesses. Perhaps it would have, in 1967. That was the year the floppy disk was invented at IBM.

[iv] States typically depend on voluntary means of collecting from individuals, such as a voluntary line on the income tax form. Audit procedures, which are used for businesses, are ineffective for consumers.

[v] On Cyber Monday (the first Monday after Thanksgiving) in 2011, over $1.2 billion in sales were transacted online. On that day alone, approximately $58 million in sales tax went uncollected.

[vi] FedTax has been designated a Certified Service Provider (CSP) by the Streamlined Sales Tax Governing Board specifically for its TaxCloud service. There are six CSPs and 24 member and associate member states.

[vii] Although “software and services” is not defined in the Marketplace Fairness Act, likely it will include Application Programming Interfaces (APIs), Web Services, rates and boundaries databases, and a process for certifying service providers to process returns accurately under state laws.

[Download PDF of FedTax Senate Finance Committee Statement – 4/25/2012]


Bellas Hess, Quill, and online sales tax collection

April 25, 2012

As you’ve likely noticed, there has been quite a bit of news lately about online sales tax collection. In the media coverage of this issue, we’ve frequently seen glancing references to the Supreme Court cases Quill or Bellas Hess—but rarely an actual explanation of how they affect consumers, retailers, and states, let alone what exactly those rulings say.

On this occasion, the eve before the Senate Finance Committee Hearing “Tax Reform: What It Means for State and Local Tax and Fiscal Policy” (where we expect the Marketplace Fairness Act to be discussed at length) we thought it might be helpful to give a brief review of these two landmark Supreme Court cases.

This post is not a scholarly analysis of the (dormant) Commerce Clause, or due process concerns, or states sovereignty and federalism—such analyses are amply handled by greater legal/constitutional minds than ours. Rather, this post is intended as a primer for business leaders, so they can understand why these rulings are important and why the logic underlying them is so out-of-date—warranting attention and action by Congress.

Bellas Hess refers to the 1967 Supreme Court case National Bellas Hess v. Department of Revenue of Illinois. Illinois’s Department of Revenue attempted to force catalog retailer Bellas Hess, which was based in Kansas City, to collect Illinois sales tax. Bellas Hess refused, and the case went all the way to the Supreme Court.

In its ruling, the Supreme Court said that only businesses with nexus in a state have to collect sales tax for that state. Nexus is created by a physical presence, though opinions on what constitutes a physical presence vary. It can be a warehouse, office, retail location, employees, or even vehicles. Some states have argued that having business affiliates in a state creates nexus there.

In any case, the Supreme Court specified that businesses had to have nexus in a state to collect sales tax there because it would be too burdensome for a business located in one state to collect sales tax for another state (possibly every state). Specifically, Justice Potter Stewart wrote in the majority opinion:

The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National [Bellas Hess]’s interstate business in a virtual welter of complicated obligations to local jurisdictions.

(emphasis ours)

Interestingly, in the dissenting opinion, Justice Abraham Fortas wrote that “the Court’s response that these administrative and record keeping requirements could ‘entangle’ appellant’s interstate business in a welter of complicated obligations vastly underestimates the skill of contemporary man and his machines.” We couldn’t agree more—and it’s even more true now, in 2012, than in 1967. We know that technology is able to handle multistate sales tax because we’ve built a service that does so: TaxCloud.

The Bellas Hess ruling went on to say that an act of Congress was necessary to give states the ability to require out-of-state businesses to collect sales tax. Without an act of Congress, the Supreme Court ruling was the ultimate authority on what states could and could not do.

In 1992, the issue of out-of-state sales tax collection arose again. North Dakota tried to require Quill Corporation, a mail-order office supply company incorporated in Delaware, to collect tax on its sales into the state. Quill refused on the grounds that it had no physical operations or employees in North Dakota.

The Supreme Court sided with Quill, citing the previous ruling in Bellas Hess and stating that customers alone (in other words, an economic presence) weren’t enough to create nexus.

However, in the Quill ruling, the Supreme Court specifically invited Congress to exercise its authority to overrule the Supreme Court by enacting legislation:

[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions. See Prudential Insurance Co. v.Benjamin328 U.S. 408 (1946). Indeed, in recent years Congress has considered legislation that would “overrule” the Bellas Hess rule. Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today we have put that problem to rest. Accordingly, 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.

Indeed, even if we were convinced that Bellas Hess was inconsistent with our Commerce Clause jurisprudence, “this very fact [might] giv[e us] pause and counse[l] withholding our hand, at least for now. Congress has the power to protect interstate commerce from intolerable or even undesirable burdens.” Commonwealth Edison Co. v. Montana453 U.S. 609, 637 (1981) (White, J., concurring). In this situation, it may be that “the better part of both wisdom and valor is to respect the judgment of the other branches of the Government.”Id., at 638.

(emphasis ours)

In other words, the Supreme Court left the issue up to Congress.

To sum up: The Supreme Court rulings in Bellas Hess (1967) and Quill (1992) determined that a business needs to have a physical presence in a state in order for the state to require the business to collect sales tax. What constitutes a physical presence is still a matter of debate, however.

The Supreme Court also made it clear that Congress has the power to pass legislation changing the outcome of the Supreme Court rulings. And because the Court based its decisions on the idea that collecting sales tax would be too burdensome for remote retailers, an idea that technology has rendered moot, it’s critically important that Congress do so.

We hope Congress will learn enough tomorrow to pass the Marketplace Fairness Act quickly to correct the devastating imbalance impacting retailers, consumers, and local governments across the country.


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.


National Retail Federation outlines the “big picture”

April 22, 2011

This post on the National Retail Federation’s blog sums up the need for federal legislation nicely: “The discussion about broadening the base for sales taxes and lowering rates . . . will not happen until Congress passes legislation to close the Quill loophole.”

We were also struck by these sentences in the post, which deliver stark truths unflinchingly:

While conservatives and liberals fight over big picture issues like taxes and spending, real Main Street retailers are caught in the crossfire, and jobs are at stake.

and

Sales tax rates of 8 or 9 or 10 percent on a narrow base of taxable goods will inevitably drive consumers to search out lower tax alternatives. It is an absolute truth that where unfair tax policies treat similar entities differently, consumers will vote with their feet whether it’s across state lines or across sales channels.

The post comments on both a Wall Street Journal editorial and a letter to the editor about the editorial. The letter to the editor, written by Sandy Kennedy, president of the Retail Industry Leader’s Association (RILA), states that “as the American economy grows and evolves, it’s only prudent that we update our laws to reflect new realities” and makes it clear just how much those laws need updating:

The Journal is correct that the Supreme Court’s decision in Quill Corp. v. North Dakota [which stated that retailers must collect sales tax only for states where they have a physical presence] gives Amazon.com Inc. a loophole for evading sales tax collection. But that decision came in 1992, when no American without an MIT degree knew what the Internet was.

Kennedy also succinctly makes the case for leveling the playing field between online retailers and local retailers: “There is no reason government should be protecting a loophole that gives some companies a competitive advantage over others.”

We were also glad to see her point out that “readily available software has made sales tax collection across multiple jurisdictions remarkably simple.” We agree—that’s exactly what TaxCloud does.