Americans have been squabbling about taxes ever since the Boston Tea Party. More recently, in May 2013, the Senate approved the Marketplace Fairness Act (MFA), and then the issue of online sales tax was shelved by Congress. Although three bills relating to remote sales tax were introduced in 2015 — an updated version of the MFA (SB 698), the Remote Transactions Parity Act (HR 2775), and the Online Sales Simplification Act (in draft form only) — none has as yet gained any traction. But that may change this fall. Remember your U.S. history lessons about States’ Rights vs. Federalism? When it comes to taxes, those arguments are alive and kicking.
Last week, Bob Goodlatte (R-VA), Chairman of the House Judiciary Committee and de facto gatekeeper of any online sales tax bill, circulated an updated version of his Online Sales Simplification Act (OSSA) discussion draft. According to a House Judiciary Aide, “The draft flows from two key principles: Simplicity, particularly for small businesses, and No Regulation without Representation.” Under OSSA, a state would collect tax only on sales originating in the state, meaning the seller has a physical presence there.
Yet changes in remote sales tax policies don’t necessarily depend on federal legislators. Numerous states have enacted affiliate and click-through nexus laws, under which certain remote retailers are on the hook to collect sales and use tax because of their affiliate relationships and/or links on websites owned by state residents. In addition, new economic nexus laws in Alabama and South Dakota are challenging the physical requirement precedent upheld by the 1992 United States Supreme Court decision in Quill Corp. v. North Dakota. Both states are being sued over their policies and both hope to take their cases to Supreme Court, which they hope will overturn Quill and grant states the authority to tax certain remote sales. Read more about state battles over online sales tax.
Instead of challenging or expanding the definition of nexus, Colorado and Vermont have imposed use tax reporting requirements on remote e-retailers to attempt to increase use tax compliance. States are entitled to tax revenue from taxable remote sales — when sales tax isn’t collected by a retailer, consumers are supposed to remit use tax to the state. Yet individual use tax compliance is low, and enforcement is difficult. It remains to be seen whether the policies in Colorado and Vermont will be effective.
In short, a majority of states want remote sales tax revenue, and lawmakers will continue to push for it in state capitols and on Capitol Hill. There is no guarantee their efforts will be successful; if they are, what remote sales tax compliance will look like from state to state is unknown.
What OSSA 2016 might mean for e-retailers
The issue of remote sales tax remains a divisive one among federal lawmakers. The 2015 OSSA draft never became a bill, and OSSA 2016 currently exists in draft form only. Although eBay reportedly expects a vote to occur during the lame duck session this fall, the Wall Street Journal notes, “It isn’t clear yet whether
No matter what happens at the federal, state, or Supreme Court level, businesses using sales tax automation need not panic. Change is the status quo when it comes to sales tax; a new remote sales tax policy would be just one of many.
Cloud-based sales tax automation enables retailers to comply with sales and use tax rates, rules and regulations in multiple states with minimal effort. Avalara AvaTax automates all aspects of sales tax compliance, from tax calculation to certificate management to returns and filing. Learn more.
Details on OSSA 2016
As explained in the OSSA discussion draft, “A state may impose a sales, use or similar tax on a seller, or impose on a seller an obligation to collect such a tax imposed on a purchaser, with respect to remote sale of a product or service only if—
- The State is the origin State for the remote sales (where the company had the most employees during the previous calendar year);
- The tax is applied using the origin State’s tax base applicable to non-remote sales; and
- The State participates in the State tax clearinghouse”
Central to the plan proposed in OSSA is a state tax clearinghouse, “to be established by the participating States.” The clearinghouse would collect sales and use tax revenue from state revenue offices and distribute that revenue to participating states. It would also create audit regulations and reporting requirements. Participation in the clearinghouse, although encouraged, would not be mandatory.
Rates and rules
For states participating in the clearinghouse, remote sales would be taxed at a single statewide rate established by the destination state (the location of the consumer). In this scenario, a seller based (with the most employees) in New York City would collect the California single statewide rate on a sale to a consumer located in California.
If the destination state doesn’t participate in the clearinghouse, the origin state’s normal tax rate (the combined state and local rate) would apply. In this case, the New York seller would apply the New York City rate to the California consumer’s sale.
Retailers would rely on the origin state’s product taxability rules to determine which goods and services are taxable and which are exempt. In both of the above examples, New York and not California product taxability rules would apply.
OSSA also presents a plan for dealing with buyers and sellers located in the five states without a general sales tax: Alaska, Delaware, New Hampshire, Montana and Oregon.
For a closer look, download The Online Sales Tax Showdown, a report by Internet Retailer with support from Avalara that looks at what federal sales tax legislation could mean for your business.