Online Sales Tax: A Refresh and Update

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Image: GotCredit, Flickr

It’s tax season, and, like your own personal taxes, the issue of an online sales tax is pretty complicated. Over the past several years, ecommerce has seen an explosion of growth, enough to get the attention of Uncle Sam who’s always hungry for more revenue. Although there have been a few failed attempts to implement national online sales tax legislation over the years, things may be changing in the near future.

The Proposed Laws

Before we get into the recent updates propelling this issue forward, let’s backtrack to what’s already happened in the intricate world of taxation.

Way way back in 1992, the Supreme Court ruled on a case called Quill Corp. v. North Dakota and essentially decided that sellers only have to collect sales tax from customers living in states where they’ve got a significant presence – a nexus. That nexus can be a variety of things, like an HQ, warehouse, brick & mortar, etc, but, for online merchants, it’s generally the state where they operate.

A couple of recent bills intend to get rid of the concept of a nexus, making online retailers beholden to whatever sales tax exists in whatever state, even jurisdiction, the customer lives.

Two online sales tax laws are still floating about in Congress. The Marketplace Fairness Act (MFA) emerged in 2011, had a few tweaks made, passed the Senate, but stopped short in the House of Representatives in 2013. Another bill also popped up last summer called the Remote Transactions Parity Act (RTPA). It’s definitely based off of the MFA, but there are some key differences that make a bit more intense. Below are some overviews of each.

Here are the Marketplace Fairness Act’s (MFA) basics:

  • Sellers grossing $1,000,000 in out-of-state sales per year must collect sales tax from buyers in states that impose it
  • If a merchant makes a sale in a state where they have no physical presence, it’s an out-of-state sale
  • Certain products will have specific taxes, depending on state tax code
  • Sellers will have to comply with each state’s tax code if they make a sale there

The Remote Transactions Parity Act (RTPA) is very similar, but differs in the following:

  • Businesses making $10 million or less in the first year are exempt from the online sales tax
  • In the second and third year, businesses making $5 million and $1 million or less respectively are exempt
  • There is no exemption from the sales tax after four years
  • But any sellers using an electronic marketplace are entitled to no exception at any point, regardless of revenue

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Image: Simon Cunningham, Flickr

A Taxing Tax Issue

Much of the opposition toward MFA and RTPA stems from the complexity of tax codes that may overburden smaller online retailers. Plus, many online merchants work with thin margins due to shipping costs that many brick & mortars don’t always handle. If one of the laws was to go in effect, e-retailers would have even slimmer margins when selling to consumers that don’t reside in their business’ state. While the above laws apply after a certain revenue threshold, it doesn’t necessarily take into account the business’ margins.

Compared to the MFA, the RTPA is just as terrifying to many online merchants because many use shopping carts and marketplaces, which waives their temporary exception from the law. Not only that, but there’s considerable pressure to grow quickly in an ecommerce environment that’s getting increasingly crowded by the day.

That said, it’s one thing to talk about the issues of a bill, and another to actually get it enacted.

Pushing up the Hill

The hill – as most people know – tends to act slowly. Both bills have been pushed aside in Congress before, although there are talks of bringing the MFA to at least the Senate floor again.

But state governments are impatient. Online retailers selling to out-of-state customers whose state governments are unable to properly collect online sales taxes are directly in their sights. And they’re hellbent on getting their tax revenue. Even if it means going to the Supreme Court.

The Wall Street Journal reports that a group of state officials are eager to instigate litigation with specific businesses that don’t collect online sales tax when selling to out-of-state customers. By doing that, they’re hoping to get sued and tangled up in a lawsuit that forces the federal government to decide on a uniform online sales tax that’s, above all else, able to be collected more easily.

The gambit is aimed at creating business blowback and a confusing national patchwork of laws that might prompt Congress to act. Short of that, the states want their moves to be questioned legally so they can ask the Supreme Court to overturn a 1992 ruling that forbids taxation of Internet sales by retailers that lack a physical location in a state.

Why are they pushing so hard? Because online sales tax laws are both scattered and complicated, out-of-state businesses aren’t collecting an online sales taxes, and – to return to the original argument – it would bring some fairness to brick & mortar, local businesses that must pay a sales tax and are supposedly at a disadvantage because they’re (choosing) not to sell online.

The End Game

However, according to some, the issue has far less to do with helping brick & mortar stores, and more to do with states’ inability to actually collect taxes on online goods. Emphasizing small, physical businesses are only an excuse; governments just want tax revenue that they can’t get. Furthermore, much of the opposition argues that online merchants themselves are also small businesses. Whether you’re on the web or on the street, taxes do not help smaller retailers.

The debate on online sales tax legislation is like any other debate – there are pros and cons, and people have their own self-interests in mind – but as ecommerce continues its growth track, it becomes a larger target. Is stronger online sales tax legislation on the horizon? Will online businesses have to collect from out-of-state customers whose governments enforce online sales taxes? Only time will tell, but it may just be a matter of “when.”