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Monday, June 27, 2011

Sales Tax Collection on Internet Sales

The drama continues ...

States continue to try to find ways to get Internet retailers to collect sales tax from in-state customers rather than relying on customers to self-assess and pay their use tax. (Of course, there are exceptions, such as I just posted about the other day where South Carolina carved out an exception for Amazon and other large Internet vendors willing to make a large investment in the state.)

The pending bill in California, passed in June by Assembly and Senate, is ABX1 28. It would broaden the definition of retailer engaged in business in California, for sales tax purposes to include:

"retailer engaged in business in this state any retailer entering into agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by an Internet-based link or an Internet Web site, or otherwise, to the retailer, provided the total cumulative sales price from all sales by the retailer to purchasers in this state that are referred pursuant to these agreements is in excess of $10,000 within the preceding 12 months, and provided further that the retailer has cumulative sales of tangible personal property to purchasers in this state of over $500,000, within the preceding 12 months, except as specified. This bill would also provide that a retailer entering into specified agreements to purchase advertising is not a retailer engaged in business in this state and would define a retailer to include an entity affiliated with a retailer under federal income tax law, as specified. This bill would further provide that these provisions would not apply if the retailer can demonstrate that the referrals would not satisfy specified United States constitutional requirements, as provided."

So it is similar to the 2008 New York legislation that makes an Internet retailer subject to sales tax collection based on in-state activities of "associates" (those with a link on their website where they get paid if someone places an order by starting with that link). One big caveat, likely directed to help eBay and its users, is the $500,000 amount. Otherwise, eBay is like an "associate" for those selling items on eBay (because eBay gets a commission on the sale) causing hundreds of thousands of eBay users to have to collect California sales tax.

Also, the rebuttal approach of New York is greatly modified. The vendor would need to show that requiring them to collect California sales/use tax would be against the Due Process and/or Commerce Clauses of the US Constitution.

Will this bill be signed by Governor Brown? Perhaps. If yes, Amazon is likely to cancel its associate agreements as it has threatened to each time this type of legislation comes up in California (see 3/3/11 CBS article), and as it has done in states other than in New York (New York offered amnesty, don't know if that was the reason why Amazon started collecting sales tax in New York - see 3/9/11 post).

So, if Amazon (and perhaps other large Internet vendors) cancel their contracts, what does California gain? For my answer, see 3/9/11 post, and consider:
  • Wouldn't additional efforts to educate consumers about their use tax obligations make more sense?
  • Is it time for California to take a new look at the Streamlined Sales & Use Tax Agreement and considering modifying our tax law system to match it and then strongly encouraging Congress to reverse the Quill decision for states that have adopted it? Vendors would have some free software tools available to help with compliance and there would be greater uniformity among states for vendors. However, there would not be the most sought after uniformity - one rate per state.

What do you think?


Frank said...

The basic problem with states taxing internet sales (which is what PL 86-272 seems to be more about) is the greed of the individual states, which causes an amount of complexity that clearly interferes with all states benefiting. It would seem that a central taxing authority on the states behalf should at least be considered. There would be certain rules that would have to apply. For example the same sales tax for all states. All business get taxed on all sales, and all taxes need to be paid to the same authority. In other words, make it simple for business to charge sales taxes. As it is now, some states, including NC, want the business to separate sales tax by county. So a small busies might have to separate their collection from sales taxes only for those who receive items in their state, which is extremely difficult for small businesses. For example, NC had 80 counties. Ckmplying borders on Cruel and Unusual Punishment for small familey businesses. They are usually bounded by the shopping cart that they usually rent per month and county is not usually requested. It makes a dreadful situation for business and the states need the support of the businesses, if they expect even a reasonable time frame to solve this issue.

The central taxing authority can transfer taxes to each state based on their population of that last census, or basically via the amount of representatives each state has in congress.

This will never happen as the states are too self-serving and greedy, so many will figure out points of view that would give them more of the pie. Personally they would be more intelligent to do this immediately and then take all the time they need or want to figure out a better way.

Another draw back is that many of the internet business are owned by foreigners, which will not have to collect sales taxes, giving them a huge advantage. What state are they located? Who are they shipping to and from where? All moot questions if the states tried working together to make the collection of sales tax easy and consistent.

On a similar note, I think most sales tax are much to high and impact the economy in a negative way. Citizens are unsympathetic and unfriendly toward them because because they gouge into their person income, which means they can purchase less for their families. If it were small, say 2% or 3%, I think most people would be more positive toward paying it. The way it is now, the customer is discouraged from shipping in their own state because they may be taxed an extra 8% to 10% or so, where if they just shop 1 click away, at a store in another state, they will save that tax and the product will usually ship from the same distributor. The end result, is that no state will get a dime from that purchase.

Smarten up states. Set a 3% Sales Tax across the board, that should meet with little resistance form the store owner or consumers. Have it all paid to the same place. Distribute it based on your population and start collecting sales tax that you would otherwise, not see for years or possibly decades.

Personally, I think the entire sales and income tax system should be tossed out. Taxes like gasoline, alcohol, gun and cigarette tax are much more fair and productive. Frank

p.s Nice job on your write-up.

SRW said...

I have been actively engaged supporting the Mainstreet Fairness Act since discovering the impact of misconceived tax free internet sales. My fingers are getting tired from blogging so I have attached a previous response for your review. Thank you in advance for your efforts.

Than you for being and advocate for multijurisdiction tax collection on Internet purchases. I have been following the issue for some time. While the logic to collect Internet sales Tax is universally sound, the one hurdle that remains unanswered in many minds in the actual method to make such taxation possible. Many business owners have failed to recognize there is a solution available via the Internet that not only handles all facets of tax calculation, collection, remittance and filing, but also streamlines businesses.

I am a small business owner with less than $50,000 in annual sales located in New York. As you know when I elect to engage in physical business activities in surrounding states such as MA, PE, ME, NJ etc. I am required to obtain and complete the necessary forms engaging my business as Taxing agent for where I do business. Then there is the remittance that follows. After a recent experience in MA consuming three hours to remit relatively insignificant amount, I began to question if there was better way to accomplish the same task more efficiently. I turned to the Internet and found FedTAx' service available to any business of any size FREE of charge. Now my sales tax calculation, collection, remittance and filing is handled easily through an automated process for any SSUSTA member state, and for non member states a return is generated for me to file. No longer are my accountant, bookkeeper or myself being frustrated by the burden of individual filing applications and submissions. From an economic perspective the solution has streamlines my business operation saving time and money. More importantly tax revenues are realized by states in 45 days instead of quarterly or annually increasing money velocity.

The Mainstreet Fairness Act will indeed create jobs and so much more as you have stated in your paper Final Alliance Internet Tax Report. However, still unrealized to most is the very fact there are means to streamline handling of all sales tax matters making all businesses more competitive. I have volunteered to spending 20 minutes to become a TaxCloud merchant and integrate my web page. Now my company calculates and remits sales taxes in any jurisdiction in any state at no cost to my business. I believe this to be an important aspect to arguing for Internet sales tax collection. Many, including our state and federal legislators, still believe the task of multijurisdictional tax collection and remittance cumbersome.

Another interesting point brought to my attention is the unintended effects of non compliance upon lower income earners. Lower income earners lack the means and credit to engage in online transactions making only local brick and mortar merchants available. Local merchants must collect and remit sales taxes. Since lower income earners lack the means to engage in misapplied tax free shopping, they indirectly pay higher taxes than those with means to avoid current tax law. I argue that misapplied unpatriotic tax free Internet purchases, perhaps slightly, is adding to income and class disparity.

Also, I am certain with falling sales tax revenues states have been forced to increase and create additional taxation policies to close the increasing gap in revenue shortfalls. The alternatives to a consumption based sales tax are always overlooked by opponents of the Mainstreet Fairness Act. Do you have insight into alternatives? My response to bloggers continues stating that the alternatives to sales tax are far more burdensome to consumers/tax payers.

Anonymous said...

More from SRW ...Part 1

California is the third largest economy on the planet. Like so many other states they find themselves in an economic crisis due to the fact that residents continue to want education, health care and services they cherish, but not desire to pay for it. Simply, sales tax is due to be remitted on individual state tax returns on Internet purchases where the retailer failed to do so. Internet sales are not legally tax-free even though everyone maintains entitlement issues misapplying tax-free status. Just imagine if residents had remitted the sales taxes legally due over the past 10 years. Back in the 90s when we all enjoyed prosperity and a balanced budget there was no argument over sales tax. Internet shopping was in its infancy and still a majority of shoppers were content paying a small percentage of sales tax on each purchase. However, with the explosive growth of internet shopping, the graph has flipped eliminating billions of dollars from state budgets that fund public universities, libraries, police, infrastructure, health care, etc.

Many have latched onto the argument that calculation, collection and remittance of sales tax for the thousands of tax jurisdictions is too cumbersome and costly. STOP! I am a small business owner in NY State with less than 50K in annual sales who has voluntarily subscribed to an online service that transparently integrates with my web page and shopping cart allowing me to calculate, collect and remit sales taxes in any jurisdiction FREE of charge. After 20 minutes of administrative effort signing up for, my company now enjoys savings and greater efficiency. All my tax calculation, collection, remittance and filling is now handled FREE of charge.

Individual state Nexus legislation is definitely the wrong approach to resolving the uncollected tax due issue as it make the process more complicated instead of streamlined. For almost 20 years the Streamlines Sales and Use Tax Governing Board has been diligently working simplifying tax definitions and reporting standards while maintaining State's Constitutional taxing autonomy. There are now 23 full member states with many of the rest working toward the same goals. Unfortunately, one of the major hurdles standing in the way of Federal legislation is the misconceived notion of "Internet Tax" and sales tax due being referred to as a "New Tax."

States are not attempting to tax in any way the Internet, or its access. The issue is the lawful collection sales tax due on goods purchased. The goods to be taxed are the very same tools, televisions and jewelry sales tax is collected on at local brick and mortar retailers. As discussed earlier the sales tax due is already required by law to be remitted by the retailer or consumer on all taxable goods purchased. States are attempting to collect tax we all continually vote to support. I do not ever remember any one group or individual politician pledging to abolish sales tax in its entirety on every good purchased. The Republicans simply signed a pledge not to enact any new taxes. The passage of Federal Legislation known as the Mainstreet Fairness Act simply is a states rights issue empowering the collection of an existing tax already legally due.

Anonymous said...

More from SRW - Part 2:

I have also heard arguments reflecting merchant’s objection to paying tax to a jurisdiction in which does not maintain nexus. Wrong! Sales tax is calculated according to the destination goods will be shipped and used. Sales tax are assessed the consumer purchasing goods, and remitted to the jurisdiction where the consumer resides paying for the schools, services, health care, etc. directly benefitting the consumer. Businesses do not subsidize sales tax. The retailers simply act as agents calculating, collecting and remitting the tax due to benefit consumers.

It's now easier for my company to calculate, collect and remit sales taxes than shipping in most cases. Until recently I would agree there were hurdles in the way of multijurisdictional tax collection and remittance. However, the only obstacle standing in the way of Federal legislation is misinformation. States are insisting upon putting an end to the need for harmful individual state nexus affiliation legislation requesting the passage of The Mainstreet Fairness Act. Amazon's CEO Jeff Bezos openly supports Federal Legislation as the solution. As an observer, and citizen, I see no reason why each and every business should not calculate, collect and remit sales tax due. Why should Amazon be the only one required to do so? If my business with less than $50K in annual sales easily engages in the lawful calculation, collection and remittance of sales tax due so can any business.