Vermont Study on its Sales Tax

In July, I blogged about the formation of a Study Committee in Vermont on the Sales and Use Tax (7/3/12 post). Well, I had the opportunity to testify before the committee (by phone) on October 15, 2012. This committee will look at a few aspects of sales tax issues. The October 15 hearing focused on e-commerce issues. I was asked to testify on State Solutions to Collecting from Remote Vendors.

A few of my comments:

"In framing the issue it is important to consider the parameters states face in reaching the goal of collecting sales and use tax in the e-commerce environment. The state sales tax is an existing significant tax. In Vermont it represents about 24% of the total tax base. It would be good to collect this tax that's already on the books rather than raise or create other taxes.  The challenge is the nexus requirement for sales tax which provides that vendors need only collect sales tax from customers, if the vendor has a physical presence in the state, and that presence is more than a slightest presence and per the 1987 Tyler Pipe case, "whether the activities performed in [the] state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales.""

Physical presence is not an entirely clear standard as evidenced by conflicting decisions among state courts and sometimes even between a higher and lower court within the same state. As noted by the District Court in the Direct Marketing Association v Colorado case of 2012, the Quill decision puts states in a "difficult position." Quill and e-commerce leave states with limited options to collect all of their sales tax.

I have created a map that shows various actions taken by some states which I'll get into shortly.  But it is important to note that whether the action was joining the Streamlined Sales and Use Tax Project or enacting so-called "Amazon" laws or affiliate nexus laws, no state is collecting all of the sales and use tax it is entitled to. 

Looking at state actions to collect sales and use tax, we should consider both legislative actions and administrative actions. States should also consider sales and use tax in the context of both sellers and buyers and the costs of compliance and competitive issues regarding whether vendors have to collect. We also need to consider the reality that any federal solution will most likely exempt small sellers, so consumers will still need to understand their use tax obligations."

I noted that legislative measures in some states, such as the so-called "Amazon laws" were not effective because they do not apply to all vendors, are easy for vendors to avoid (such as by canceling their affiliate contracts), and might not meet the constitutional requirements of Quill and Tyler Pipe. I noted, as I've been stressing for years, that adminstrative efforts should be pursued including finding vendors who do have a physical presence in the state and better educating consumers about their use tax obligations.

I'll post more later on some of my recommendations.

What state action would you recommend to improve sales/use tax collection on e-commerce sales?