The state of federal online sales tax legislation

It’s been nearly six years since the first online sales tax bill was introduced to Congress. On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. The decision overruled a longstanding physical presence rule, allowing states to require remote sellers to collect and remit sales tax. Since Wayfair, most (but not all) states have adopted new rules defining what establishes a sales and use tax obligation, known as nexus. Unfortunately for businesses, no two state sales tax nexus laws are alike.

Despite multiple reiterations of various proposed legislation, federal lawmakers have yet to enact any into law. But that doesn’t mean that Internet sales are tax free or that remote sellers aren’t required to collect sales tax on purchases made online. Quite the contrary. In the absence of a federal mandate, states are reinterpreting sales tax nexus rules, often relaxing the physical presence constraints in favor of a broader interpretation. Rates and rules for taxing online sales can be vastly different from state to state, making compliance more challenging for sellers.

What would any respectable policy change be without opposition? The No Regulation without Representation Act of 2016 (HR-5893) is an anti-remote sales tax bill introduced in July 2016 by Congressman Jim Sensenbrenner (R-Wis), which aims to reinforce the physical requirement for nexus set forth in Quill. If enacted, the bill could block the states from imposing nexus based on other criteria, including click-through and affiliate nexus. Notice and reporting requirements such as the one established in Colorado would also be pre-empted by the physical presence requirement.

The issue of remote sales tax remains a divisive one among federal lawmakers. Despite multiple attempts to resuscitate interest in a federal law, all four bills continue to languish with Congress, collecting dust. Earlier this year, Supreme Court Justice Kennedy called the delay “a serious continuing injustice” against the states in hindering their ability to collect sales tax revenues from online sales. And the National Governors Association (NGL) and the National Conference of State Legislatures (NCSL) joined forces in their efforts to put the question to rest once and for all. However, it’s looking more and more likely that 2016 will come and go without a federal formal ruling on remote sales tax.

This leads us to the states, which are busily continuing to set their own rules around sales tax on remote sales. More than half of US states have already enacted affiliate and click-through nexus laws requiring out-of-state sellers to collect and remit sales and use taxes if they have created sales relationships through affiliates, referrals or links on websites. And more states are getting behind economic nexus, led by the initiatives of Alabama and South Dakota.

While more liberally applied nexus laws make it easier for states to get sales tax revenues they feel they are owed, they make it infinitely more difficult for businesses to comply with the cacophonous rules around collection and remittance of sales tax in multiple states where they now have to register and file returns.

With 12,000 taxing jurisdictions in the U.S. and more than 27,400 changes to tax rates and product taxability rules in the U.S. already this year, sales tax is already complicated and burdensome to manage. When remote sales are added to the mix, that complexity only increases.

Whether or not sales tax is owed isn’t something you want to arbitrarily decide each time a customer makes a purchase online. Not charging sales tax or charging a flat rate is risky and a red flag for auditors. Avalara’s tax automation software makes those nuanced decisions for you and ensures the right tax rates, tax rules and exemptions are instantly and accurately applied to every transaction.

When you’re con dent the right rates and rules are being applied to every transaction and can easily pull data to support that, it’s much easier to prove compliance and a lot less work for your financial team. And your customers will be happier knowing up front what their final costs will be – tax included.

Bottom line: The passage or failure of federal online sales tax legislation shouldn’t be the catalyst for changing how you handle tax compliance in your business. Enough is happening already at the state level that industry experts and analysts advocate automation as a best practice to stay on top of sales tax obligations, protect your business and deliver a quality experience to customers.