A look at the Collection of Sales Taxes

Interesting column in Internet Retailer looking at the reaction of online retailers to the potential overturning of the SCOTUS 1992 ruling in Quill Corp. vs. North Dakota.  For those who are not familiar with the ruling, Quill Corp. vs. North Dakota was the Supreme Court ruling that said businesses without a physical presence in a state did not have to collect sales tax from customers who lived in that state, effectively preventing states from collecting sales tax on mail order and online purchases. The ruling was based on the Dormant Commerce Clause of the Constitution, which prevents states from interfering with interstate commerce unless specifically authorized by the United States Congress. Since Congress had not passed any laws dealing with the situation at the time, the court determined that Quill did not have a “substantial nexus” or connection to North Dakota and was thus exempted from collecting  and remitting sales or use tax to the state. However, the Court did explicitly state in its ruling that nothing prevented Congress from passing legislation to deal with the situation. Since, internet commerce was in its infancy at the time, with sales amounting to less than 1% of all retail sales, and the Congress has never met a situation it did not want to kick down the road until it became absolutely imperative to deal with it, Congress passed on developing any legislation to authorize states to collect sales tax from internet companies without some physical location in the state.

However in 2015, in his concurrence to the Court’s ruling on Direct Marketing Association vs. Brohl,  Justice Anthony Kennedy wrote about Quill’s “Tenuous nature” and the “serious continuing injustice faced by Colorado and many other States”, offering the states an opportunity to forcing “Kill Quill” suits by passing legislation compelling out of state vendors to collect and remit sales tax, forcing the vendors to bring lawsuits attempting to overturn the legislation. The states then expect these lawsuits to provide a legal vehicle to move the dispute back to the Supreme Court, revisiting and, the states hope, overturning the ruling. So far, the states’ plan has worked with argument of South Dakota v. Wayfair Inc. before the Court scheduled for this April .

Some of the comments from online only retailers in the column noted at the top really struck me, especially this one, in the light of the increased use of MAP in the gaming industry, by Deb Beresford, ecommerce manager at web-only sunglasses retailer X-wear.com:   “In the last two years, many of the sunglasses brands that we sell have changed their policies to require their retailers to maintain minimum advertised pricing. Because we can no longer discount most of these sunglasses, we lost huge revenue on the marketplaces where we list our products. The only reason I believe we capture any out of state customers is because they don’t have to pay sales tax. It’s very hard to find an edge in this market now without the courts taking away the one thing that gives any of us a fighting chance” and this one from Atinc  Sonmezer,  CEO of dancewear retailer MissbellyDance.com:  “ It will be very costly. I’m not sure how small businesses selling on Amazon nationwide will be able to handle it.”

Even Congress will probably move on this. I spoke with my House Representative this week and he said online sales tax reform was the number one topic mayors in the cities in his district wanted to discuss. We will see what happens but I expect to see some legislation dealing with the situation in the next year or three.

A Look At Everyone's Favorite: Sales Taxes

Interesting column in the current issue of Internet Retailer looking at the reaction of online retailers to the potential overturning of the SCOTUS 1992 ruling in Quill Corp. vs. North Dakota.  For those who are not familiar with the ruling, Quill Corp. vs. North Dakota was the Supreme Court ruling that said businesses without a physical presence in a state did not have to collect sales tax from customers who lived in that state, effectively preventing states from collecting sales tax on mail order and online purchases. The ruling was based on the Dormant Commerce Clause of the Constitution, which prevents states from interfering with interstate commerce unless specifically authorized by the United States Congress. Since Congress had not passed any laws dealing with the situation at the time, the court determined that Quill did not have a “substantial nexus” or connection to North Dakota and was thus exempted from collecting  and remitting sales or use tax to the state. However, the Court did explicitly state in its ruling that nothing prevented Congress from passing legislation to deal with the situation. Since, internet commerce was in its infancy at the time, with sales amounting to less than 1% of all retail sales, and the Congress has never met a situation it did not want to kick down the road until it became absolutely imperative to deal with it, Congress passed on developing any legislation to authorize states to collect sales tax from internet companies without some physical location in the state.

However in 2015, in his concurrence to the Court’s ruling on Direct Marketing Association vs. Brohl,  Justice Anthony Kennedy wrote about Quill’s “Tenuous nature” and the “serious continuing injustice faced by Colorado and many other States”, offering the states an opportunity to forcing “Kill Quill” suits by passing legislation compelling out of state vendors to collect and remit sales tax, forcing the vendors to bring lawsuits attempting to overturn the legislation. The states then expect these lawsuits to provide a legal vehicle to move the dispute back to the Supreme Court, revisiting and, the states hope, overturning the ruling. So far, the states’ plan has worked with argument of South Dakota v. Wayfair Inc. before the Court scheduled for this April .

Some of the comments from online only retailers in the column noted at the top really struck me, especially this one, in the light of the increased use of MAP in the gaming industry, by Deb Beresford, ecommerce manager at web-only sunglasses retailer X-wear.com:   “In the last two years, many of the sunglasses brands that we sell have changed their policies to require their retailers to maintain minimum advertised pricing. Because we can no longer discount most of these sunglasses, we lost huge revenue on the marketplaces where we list our products. The only reason I believe we capture any out of state customers is because they don’t have to pay sales tax. It’s very hard to find an edge in this market now without the courts taking away the one thing that gives any of us a fighting chance” and this one from Atinc  Sonmezer,  CEO of dancewear retailer MissbellyDance.com:  “ It will be very costly. I’m not sure how small businesses selling on Amazon nationwide will be able to handle it.”

Even Congress will probably move on this. I spoke with my House Representative this week and he said online sales tax reform was the number one topic mayors in the cities in his district wanted to discuss. We will see what happens but I expect to see some legislation dealing with the situation in the next year or three.

Sales Taxes

This week's Rolling for Initiative column looks at the effect an upcoming Supreme Court decision could have on whether online retailers can continue to not collect sales taxes from customers and its possible consequences.

Border Adjustment Tax

This week's ICV2 column is on the border adjustment tax, proposed by the Trump administration as one form of tax reform. This would arguably solve both the problems of high levels of imports into the US and companies parking their money overseas rather than repatriating overseas profits to the US.

Death and Taxes (Well, Taxes)

Following up on the last post about Amazon and taxes, the whole argument Amazon and other online merchants make about the difficulty of collecting sales taxes from and remitting them to hundreds of thousands of localities does not hold water.  As this article points out, Amazon has had software in place since 2008 that calculates sales tax for all merchants using the website as a storefront from which to sell.  Any issue of Direct Marketing News also advertises software that will calculate sales tax for any location in the US.  Granted the software might be pricey for a smaller online retailer but collecting sales taxes nationally is feasible.

A more fundamental obstacle comes from people's misunderstanding of the nature of sales taxes.  45 states, the District of Columbia and Guam all collect some form of sales tax. In those states, the sales tax provides the largest amount of funding for services offered by states and communities.  The first misunderstanding comes when people, and even some stores, refer to stores "charging" sales tax.  Stores do not charge sales tax, stores collect sales tax.  Stores that collect sales tax have been designated by the tax collecting authority within the state with the responsibility of collecting sales tax on items sold at retail and remitting the tax collected to the state (Items purchased for resale are exempt from sales tax).  In some states, the store receives a percentage of the sales tax as payment for performing the collection, in other states, the total amount goes to the state treasury.

The second misconception is that because a business does not collect sales taxes, that somehow exempts the purchaser from owing the taxes.  This is plain wrong.  In Quill vs. North Dakota, the Supreme Court ruled that businesses "without a physical nexus" within a state were exempt from the requirement to collect sales taxes from customers within that state.  That ruling did not exempt the customer from paying the sales tax to the state.  This is often called a "use tax" and there is usually a line to pay the total use tax on a state's income tax form, assuming it collects one.  In practice, few people pay the use tax and collecting it is so time consuming that most states forgo chasing after it, leaving lawyers and tax attorneys the primary ones who pay it, costing them about $23 billion per year.  About a decade ago, Illinois made a concerted effort to collect unpaid use taxes but wound up spending almost as much in the attempt as it collected.  The Marketplace Fairness Act, passed by the Senate but likely going nowhere in the House of Representatives would overturn Quill and require online and mail order retailers doing over $1 million to collect and remit sales tax from all customers.

A third misconception, and this is one that was repeated by the COO of Amazon, Nathan Bennet so he either really does not understand how sales taxes work or is deliberately ingenuous about the topic, is that online and mail order businesses should not collect sales taxes from a remote customer because the business gains no benefits from the tax.  This, of course, is simply wrong since the tax is collected, not for the benefit of the business, but for the benefit of the customer.  The funds generated by the sales tax are designated to fund projects in the community and state where the customer resides, not to benefit the business that collects them. The business serves as the most efficient conduit through which the sales tax money flows and, in many states, having a license to collect sales taxes is a requirement for doing business (also a requirement for opening an account with many distributors).

Of course, as I noted in the last post, the direction Amazon plans to take will give it physical nexus in all 50 states, requiring it to collect and remit sales taxes, like Wal-Mart, Staples, Barnes & Noble, etc., regardless of Quill, which is why now the company supports requiring online retailers, including itself, to collect (and remit) sales taxes.  Amazing how your viewpoint changes when the new vantage point benefits you.

Amazon and Taxes

Ran across an interesting article in Business Week recently on Amazon and how it influences our lives.  Roughly 36%  of all purchases made by Americans intersect with Amazon in some way.  Either you first find out about a product on Amazon or you do some research on it on Amazon or you make the final purchase on Amazon but over 1/3 of all purchases made  currently interact with Amazon at some time before the purchase concludes.  It amazes me that one company has so much influence on our lives.

Amazon is now wanting to influences your purchases even further, by increasing its ability to provide same day delivery of products.  Same day availability of products is the major advantage brick and mortar stores have over Amazon and other online retailers.  A customer can walk into a store, pick up a copy of Settlers of Catan or Get Bit and walk out with it the same day, playing it that evening.  Currently, you cannot do that with an online retailer.  With the exception of things such as software, movies, books and other items that can arrive electronically, the customer must wait at least 24 hours for delivery.  Amazon, as the article notes, wants to change that by allowing customers to order an item online in the morning and have the physical product delivered that afternoon.

This, by the way, is why Amazon has come to support ending Congress' exemption for online retailers from collecting sales taxes in local municipalities.  Online only retailers do not have to collect sales taxes in states in which they do not have a physical nexus, so Wal-Mart, with physical locations in every state, has to collect sales taxes for all online sales.  Amazon, which does not have such, only has to collect them in places where it has physical distribution centers, and in many cases, not even then.  However, in order to provide same day delivery, the company will have to have physical locations, exposing it to the requirement to collect sales taxes.  Ergo, it wants to make certain that other online retailers, not providing same day delivery, no longer have this competitive advantage.  For Amazon, it is another win.