The state of federal online sales tax legislation
Sales tax laws determined at the state level
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.
A quick review of US sales tax law
Current US Internet sales tax policies are largely based on the Commerce Clause and two Supreme Court decisions: National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967) and Quill Corp. v. North Dakota (1992).
Both rulings established that a physical presence is required to create substantial nexus to impose tax collection duties. But many people – including certain federal and state lawmakers and Supreme Court justices – believe these laws no longer track with global commerce practices today, fall short of addressing the fairness issue with brick-and-mortar sellers, and leave states facing severe revenue losses from uncollected sales tax on ecommerce sales. Furthermore, 70% of Americans are in favor of a law requiring sales tax on online purchases.
No lack of legislative options
To address this gap, three bills were introduced to Congress aimed at establishing new rules for sales tax on remote Internet sales: The Marketplace Fairness Act (MFA), The Remote Transactions Parity Act (RTPA) and the Online Sales Simplification Act (OSSA). All three received vary- ing degrees of support and all three have yet to pass successfully through both the House and Senate.
- The Marketplace Fairness Act (SB-698) was initially drafted in 2011, revised in 2013 and revised again in 2015. MFA essentially grants states the authority to require remote sellers to collect sales tax regardless of whether or not that business has a physical presence within those states, in accordance with state and local laws, as long as those states are in full compliance with the Streamlined Sales and Use Tax Agreement. MFA bases sales tax on the location where the buyer receives the product or service (destination sourcing) and includes a smaller seller exception among other provisions.
- The Remote Transactions Parity Act of 2015 (HR-2775), drafted by Rep. Jason Chaffetz (R-UT), is similar to MFA in that it would allow states to apply sales tax to remote sales. RTPA applies many of the same timelines, requirements and rules as MFA, with a couple of exceptions: the small seller exception is different as are taxability requirements for catalog sellers.
- The Online Sales Simplification Act was introduced in 2015 by House Judiciary Chair Bob Goodlatte (R-VA) and Rep. Anna Eshoo (D-CA). A new draft also made it to the floor in 2016. OSSA differs from MFA and RTPA primarily in that it requires sellers to remit sales tax to the origin state (the location of the seller) versus the destination state (location of the purchaser), does not provide a smaller seller exception, and imposes a flat rate of tax for remote sellers from states with no sales tax. OSSA also proposes establishing a state tax clearinghouse, which would collect sales and use tax revenue from state revenue office and distribute that revenue to participating states.
Those opposed, say ‘nay’ to ecommerce sales tax
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.
States take nexus to task
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.
Why sales tax automation makes sense now
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.