States could collect billions more in sales tax from online sellers – GAO reports
- Sales and Use Tax
- December 20, 2017 | Avalara
If you sell online, get ready to collect more sales tax.
State and local governments could gain billions in revenue if they were allowed to tax remote sellers. This is according to a new study from the U.S. Government Accountability Office (GAO). Of all remote sellers, GAO says taxing online marketplace sellers would bring in the most money.
That makes your online business a potential target.
According to the report, states missed out on as much as $13.4 billion in 2017 because they didn’t make remote sellers collect tax. And it’s not just the report. There’s a growing trend for states to try and make remote sellers collect, though many online merchants still sell tax-free across state borders.
Will all internet sellers have to start collecting sales tax tomorrow? No. But it’s more critical than ever to stay informed about new laws and prepare your business to handle more sales tax compliance rules.
What’s stopping states from making all remote sellers collect today?
The Supreme Court. There’s been an explosive growth of ecommerce since 1992, the year the Supreme Court upheld a ruling that states can make a business collect sales tax only if the business has a physical connection to a state (nexus). This limits states’ ability to tax sales by out-of-state sellers.
Since then, online shopping has become a juggernaut, and it’s taking a bigger and bigger bite out of state sales tax revenue. Exactly how much revenue states are losing has been a matter of debate, though certain older reports estimated losses in the billions. The GAO report provides new evidence of the dollars lost because states can’t make remote sellers collect.
What difference does a report make?
The GAO report makes a difference on two levels. First, it gives ammo to those who want to change the laws that govern remote sales tax. They now have fresh facts that highlight how much revenue is being lost because states can’t force ecommerce sellers to collect and remit sales tax. The report also argues that enforcement is the way to capture that revenue. Many states may take this as motivation to double down on new legislation or sales tax audits.
Second, even though it’s not a-political, the report comes from a non-partisan branch of the federal government. This lends credibility to the study and means it will likely be cited in future legal arguments.
But a report on its own wouldn’t be enough to change a precedent set by the Supreme Court.
It truly makes a difference because it’s part of a growing trend to tax remote sellers.
What’s the larger trend?
Without federal sales tax legislation, states have expanded their own laws in three key ways.
- New nexus laws
A growing number of states have passed laws that define nexus on your business activities. These include:
- How much revenue you make in a state
- Getting referrals from in-state affiliates
- Using web cookies on in-state devices
- Housing inventory in a state
The bottom line is that you can’t just collect tax in your home state anymore, even when it comes to your online sales.
2.New reporting laws
Some states like Colorado make non-collecting remote retailers report the names and total annual purchases of their customers. These use tax reporting laws are designed to get retailers to start collecting the tax so they don’t have to generate the reports. It’s also possible that the states may eventually use the reports to audit individual consumers and make them pay the tax.
3.New tax laws for marketplace sales
The GAO report highlights new state laws designed to make marketplace sellers collect sales tax. For example, Minnesota and Washington are the first states to pass laws targeting marketplace sales. Some states make remote sellers collect if they house goods and fulfill orders in state. In fact, GAO discovered that at least three states are trying to get sales, shipping, and location data for goods sold through online marketplaces. The purpose would be to make those sellers collect tax.
Even though Minnesota and Washington are the first states to enact legislation taxing marketplace sales, they’re not the last. Pennsylvania and Rhode Island enacted similar laws. Connecticut and Massachusetts want Amazon to identify their third-party sellers, and South Carolina is suing Amazon for marketplace sales tax revenue.
The trend seems clear.
Who’s the biggest target? (hint: Amazon sellers)
The amount of revenue made via online marketplaces fuels the trend to tax marketplace sellers.
Of all remote sellers, GAO says taxing online marketplace sellers would bring in the most money. According to the report, states could have made as much as $6.2 billion more in 2017 if they made marketplace sellers collect tax. They estimate marketplace sellers are currently collecting 14-33 percent of taxes on their sales. All other types of remote retailers are already collecting tax on about 58-64 percent of their sales. The GAO report concludes that almost half the revenue states stand to gain would come from collecting sales tax on all marketplace sales.
Since Amazon owns the biggest piece of that pie, this makes Amazon sellers a target.
What impact will this have on your business?
The amount of revenue states stand to gain by taxing online sales is getting too big to ignore. For example, more states are likely to adopt laws that tax marketplace sales. States typically hold the seller liable for uncollected sales tax, though some, like Washington, may also hold the marketplace provider liable.
If you sell remotely, but don’t collect tax, now is a good time to evaluate your options, especially if you sell via Amazon or another online marketplace.
There are costs associated with compliance, of course. The GAO report anticipates costs will fall into three broad categories: software related costs, audit and assessment compliance costs, and costs associated with research and liability. Companies may have to purchase new software to assist with compliance; they may be audited and found liable; and/or they may have to pay an employee or outside resource to help them follow and comply with changing laws.
How should you prepare?
Fortunately, there are options for retailers.
The GAO report states that two key factors will make complying with new laws expensive for businesses: 1) lack of experience and 2) lack of software designed to file and collect tax in multiple states (p. 15).
What should you do if either of those apply to you?
If you don’t already have a trusted sales tax advisor, consider reaching out to one. Diving into multistate tax compliance without being prepared is risky. It can also eat into your valuable time. The first step is connecting with someone who can help you form a great tax strategy.
Second, if you don’t already have sales tax automation software, find a solution that integrates with all the places you handle your transactions (marketplaces, shopping carts, financial apps, etc.) The right solution can minimize your risk and reduce the time you have to spend tracking new rules and rates, and filing and collecting tax.
Finally, check back with our blog to stay current with the latest tax news and updates.
*The U.S. GAO is an independent, nonpartisan agency with a mission to “support the Congress in meeting its constitutional responsibilities,” and “provide Congress with timely information that is objective, fact-based, nonpartisan, nonideological, fair, and balanced.” You can find the report here.