When online sales tax means less income tax

July 18, 2013
Art Laffer

Art Laffer

Today’s issue of USA Today has an interesting piece by Art Laffer on how changes to the tax code can lead to economic growth. His main suggestion? Close the online sales tax loophole.

He writes:

Because state sales taxes generally have fewer loopholes and lower rates — and therefore have a lesser impact on growth and employment — pro-growth policies should favor sales over income taxes where possible.

The governors of Wisconsin, Iowa, Maine, and Ohio are already planning to put this idea into action.

If the Marketplace Fairness Act passes and these states are allowed to require online retailers to collect sales tax, the governors say, they’ll cut income taxes by an equal amount. So if online sales tax generates, say, $1 million in revenue, the cut in income taxes will equal $1 million in revenue.

There are multiple benefits to this approach, for both small businesses and taxpayers. First, it helps out the mom-and-pop businesses on Main Street, which are having a hard time competing with online retailers who don’t have to collect sales tax. The Marketplace Fairness Act levels the playing field by requiring all retailers to play by the same tax rules.

At the same time, it’s a win for taxpayers, who won’t see any increases in their overall tax bills.

For those who worry that enforcement of online sales tax will lead to more government spending as state and local governments see tax revenue rise, there’s another benefit: Since these states won’t see an overall change in their tax revenue, there’s no opportunity for increased spending.

And Laffer offers solid statistics on how online sales tax will help grow the economy:

Gross state product would increase from 1.2% in Alaska to 4.6% in Washington state over 10 years. States would see jobs created, anywhere from about 2,000 in Vermont to more than 180,000 in California. Gross domestic product would grow by more than $563 billion, creating 1.5 million jobs nationwide.

We think this idea is a win for everyone, especially in more conservative states that want to support local small businesses and avoid more government spending at the same time.

Of course, it’s dependent on the passage of the Marketplace Fairness Act. We hope that Congress—especially the representatives from Wisconsin, Iowa, Maine, and Ohio—is listening.


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.


Members of Congress, National Governors Association, and small businesses speak in support of online sales tax

June 24, 2013

At a press conference last Wednesday, Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) and National Governors Association Executive Director Dan Crippen spoke about internet sales tax.

Womack and Speier are strong supporters of federal legislation that would allow states to require online retailers to collect sales tax. Womack responded to opponents who say that enforcing a tax that usually goes unpaid amounts to creating a new tax: “You have to wonder, is avoiding or ignoring the law the leg on which you want to base your argument?” Said Crippen, “It’s no more a new tax than if you hadn’t been paying your property taxes, then suddenly you’re on the rolls and you start paying your property taxes.”

Also in attendance was Andrew DeMoss, senior accountant at Simms Fishing Products in Montana, who spoke to the concerns of small businesses that collecting sales tax online could be difficult. The company recently began collecting sales tax in its online store using sales tax software. “If we can do it, anyone can do it,” he said.

In May, the Senate voted overwhelmingly in support of the Marketplace Fairness Act, a bill that would allow states to require internet retailers to collect sales tax. The issue is now with the House of Representatives.


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.


eBay and the small business exception

April 22, 2013

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

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

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

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

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

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

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


Why the number of sales tax jurisdictions doesn’t matter

April 1, 2013

Illustration by Cory Thoman - http://clipartof.com/1087428

So what does all that mean?

First, let’s be clear: It would never mean a sales tax return or an audit for each jurisdiction. The Marketplace Fairness Act says that there has to be just one central authority in each state that handles sales tax returns and audits. So no matter how many tax jurisdictions are in a state, there’s just one return to file, and if a retailer is audited, there’s just one audit from the state. And retailers who use state-certified sales tax management services don’t need to worry about audits in general—but more on that in a moment.

So what about sales tax rates, which can vary by jurisdiction?

The good news there is that the Marketplace Fairness Act requires states to provide sales tax management software or services (such as TaxCloud) for free. These programs check and update rates and product definitions for every tax jurisdiction, and it all happens behind the scenes, so sellers don’t need to worry it.

In the end, for online sellers, collecting sales tax is much like handling shipping. There’s a program or service to set up with the online store, and then the program handles everything—no matter how many tax jurisdictions there are.

Back to audits: When retailers use sales tax management programs from state-approved Certified Service Providers (CSPs), they never have to host an audit. The CSP deals with the state instead, so the retailer doesn’t need to worry about dealing with state officials and coming up with transaction records.

Rates, audits, returns, the number of tax jurisdictions—with sales tax management services, retailers don’t need to worry about any of them. It’s all taken care of.


Voters support local tax measures

November 16, 2012

Election Results

With the election over, Politico has taken a look at how local tax measures did throughout the country. The result?

During last week’s elections, voters across the country opted to raise taxes to help their cities, counties and school districts.

“I’m OK with being taxed for making sure we don’t go under and people are taken care of,” said Elizabeth Boyd, 35, an independent voter in Sacramento. “I think it’s really good for us to pay for schools and make sure they’re kept open and teachers aren’t being laid off for ridiculous reasons.”

Whether you agree with this outcome or not, the important thing is that the system works: The people who voted on the tax measures both pay the increased taxes and benefit from the services and projects they fund. Which is as it should be.

Still, we can’t help thinking that it would have been better if the increased taxes were unnecessary. Sales tax is due on online purchases but nearly always goes unpaid, to the tune of $23 billion each year. If that money had been collected at the point of purchase, just as sales tax on bricks-and-mortar purchases is, perhaps none of these tax increases would have been necessary.

If you pay sales tax on an online purchase, it doesn’t matter where the online store is—the sales tax you pay goes to your state and local community, where it funds services that voters approved.

Most people are willing to chip in for services that benefit their community. According to the Politico article,

voters tend to have a more favorable opinion about increasing taxes when they can see that the extra revenue will benefit their community directly. A 2010 analysis by The Associated Press found that voters in a large cross-section of states passed 50 percent or more of the local tax initiatives that came before them. . . .

In California, Sacramento voters, who tend to be more conservative than other areas of the state, supported a sales tax hike by a 2-to-1 ratio in addition to two school construction bonds.

“That’s a pretty clear choice of the people,” [Sacramento] City Councilman Darrell Fong said. “They don’t want to see a reduction in service, especially when it is to public safety and parks. They know we’ve made the cuts already.”