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2014: The Year of Online Sales Tax?

  • Dec 5, 2013 | Gail Cole

 Amazon lost NY case and the Supreme Court denied its request for an appeal. What next for online sales tax?

New York’s Amazon Tax was given tacit approval by the United States Supreme Court last week, when the justices denied requests for appeals by Amazon and Overstock.com. Both online retailers were challenging the constitutionality of a 2008 New York law requiring certain remote businesses with affiliates in New York to collect NY sales tax.

In other words, 2013 could be the “last Cyber Monday without sales tax,” according to Joseph Henchman of the Tax Foundation, a non-partisan research group with a mission “to educate taxpayers about sensible tax policy.”

Far reaching consequences

Laws have a way of trickling through society, and the eventual effects can be much greater than first anticipated. Consider the Temperance Movement. Maine outlawed the sale of alcohol in 1851; by 1855, 13 states had temperance laws; and in 1919, a constitutional amendment prohibited the sale and manufacture of alcohol nationwide. Prohibition began in January 1920.

State sales taxes have never been as popular as alcohol, but they have served a purpose. They were born in this country during the Great Depression, when states desperately needed revenue. If sales taxes were thought to be temporary, the money they brought in proved irresistible. They remain a source of revenue in 45 states today—though a declining source since the explosion of the online retail industry.

Use tax is not cutting it

A person living near the Texas border in Oklahoma--where the sales tax rate can be as high as 11%--would be understandably tempted to shop in Texas--where the highest rate is 8.25%. Yet that same Oklahoman can now shop tax-free on Amazon.com without ever leaving home.

States developed consumer use taxes to discourage residents from shopping across state lines, via mail order catalogs, and now, online. Enforcement of use tax, however, has always been challenging. Even the most law-abiding taxpayers are not motivated to:

  • Pay use tax to their home state on purchases made while traveling elsewhere;
  • Figure out the difference in state rates if their home state has a higher rate than the state where they vacationed (and believe it or not, state departments of revenue actually want that difference to be calculated and paid); or
  • Submit use tax on catalog and Internet purchases.

Given the difficulty of enforcing use tax compliance, state departments of revenue are educating taxpayers of their individual use tax obligations. They’re also getting creative. Some states, like Tennessee and South Carolina, require remote retailers such as Amazon to inform customers of the use tax they owe. And Colorado is trying to require remote retailers to share annual purchase summaries for customers withe state (the law is being held up because of a legal challenge).

Back to NY’s Amazon Tax Law

The 2008 New York affiliate nexus law states that businesses that enter into agreements with New York affiliates must collect sales tax. Here's how the law defines affiliate relations:

A person making sales of taxable tangible personal property or services is presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ending on the last day of February, May, August and November.

Amazon and Overstock have argued that the law violates the United States Constitution Commerce Clause and due process. Other remote retailers have made similar arguments in the past and won:

  • 1954: Supreme Court ruled in Miller Co. v Maryland that a Delaware furniture store was not required to collect Maryland sales tax when Maryland residents shopped at the store. Due process, the court said, “requires some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax.” In 1954, the fact that Miller Co. made deliveries to Maryland residents with its own vehicles and sent mailings to Maryland residents was not enough to create a definite link or minimum connection.
  • 1967: Supreme Court ruled in National Bellas Hess v Illinois that the mail order company did not have a “minimum connection” with the State of Illinois, and could therefore not be required to collect and remit Illinois use tax. The decision states that “the Court has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail.” It concluded with this statement: “The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power or regulation and control.”
  • 1992: Supreme Court ruled in Quill Corp. v. North Dakota that an out-of-state business could have “the ‘minimum contacts’ with a taxing State as required by the Due Process Clause and yet lack the ‘substantial nexus’ with the State required by the Commerce Clause” in order for a state to require a business to collect sales tax. The Court conceded that it may not be the best qualified to determine the issue of interstate commerce and concluded the ruling with the following statement: “The underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”

It’s been tough to find a way around Quill v. North Dakota, and some states have shied away from enacting Amazon tax laws because of that. Last summer, Ohio Governor John Kasich (R) had this to say when vetoing Sales Tax Collection on Internet Sales with Nexus to Ohio:

“Similar items enacted in other states have resulted in extensive litigation without necessarily producing an increase in state revenue. The federal government retains the right to regulate interstate commerce. Without the collection authority being clearly extended to the states for the purpose of out-of-state interstate retailers, the legality of this item is uncertain and problematic.”

In refusing to hear the NY Amazon tax case, the Supreme Court has refused to take up the issue. The time may indeed have come for the federal government to resolve the issue of remote sales tax.

Marketplace Fairness Act of 2013

The situation looked rosy last May, when cherry blossoms covered the nation’s capital. It seemed that federal lawmakers would provide a solution to the online sales tax conundrum. The U.S. Senate overwhelmingly passed the Marketplace Fairness Act of 2013 (MFA), which would grant states the right to require certain remote vendors to collect sales tax, provided that states first simplified sales tax compliance.

But months passed, and the House refused to discuss the matter. In September, Chairman of the House Judiciary Committee Bob Goodlatte (R) released 7 Principles of Remote Sales Tax, designed to frame the MFA discussion. In early October, it was reported that he was examining the MFA’s small-seller exemption and single audit requirements. Since then, silence.

With the end of the year just weeks away and important matters like funding the federal government looming large, the MFA is unlikely to move forward in 2013. Yet federal lawmakers won’t be able to ignore the issue forever: remote sellers like eBay will continue to fight MFA; state lawmakers and Amazon will continue to lobby for it; and more states may pass Amazon tax laws knowing that the Supreme Court passed on the New York case.

Perhaps 2014 will be the year of online sales tax.

Is your business prepared for such sales tax changes?

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photo credit: Ben K Adams via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.