Few things perplex my eCommerce clients more than the nebulous world of online sales tax collection.
Many eCommerce companies want to collect sales taxes and be a fair partner in helping states collect revenues. Unfortunately, it’s challenging for them to reasonably comply under today’s laws.
The brief history of online sales tax legislation centers around the Internet Tax Freedom Act of 1998 and its many extensions, including the most recent Tax Freedom Act Amendment Act of 2007, which expires in 2014.
Nexus of Operation
One key excerpt from the above legislation is the following:
states cannot require an out-of-state seller to collect a use tax from the customer unless the seller has a physical presence (aka nexus of operation) in the taxing state.
It’s the language of “nexus of operation” that allows many of you to order items sales tax-free. For example, since Amazon has fewer nexuses it can sell sales tax-free to many states (though this is changing).
But what does “nexus of operation” mean?
Here are a few examples of situations that may constitute a nexus of operation in states:
- The business has a physical location in the state.
- There are resident employees working in the state.
- The business has property in the state.
- There are employees who regularly solicit business in the state.
- And more recently, states that have affiliates of online retailers.
Nebulous Nexus is Expanding
Expanding the definition of nexus to include eCommerce affiliates has been a useful tactic for Big Box retailers with locations in all 50 states to encourage their online competitors to collect sales taxes on purchases.
But even online retailers without a nexus in a state, who want to collect sales taxes there, face challenges.
States and individual zip codes within states have their own unique taxing structure and laws. This added complexity makes it very difficult and expensive for eCommerce companies to comply with each unique tax code.
The Economist summed up this ambiguity in their recent article entitled “The Amazon war”:
That is because the Supreme Court ruled in 1992 that states cannot force retailers without an in-state presence, or “nexus”, to collect sales tax; it would lead to chaos in interstate commerce, since America has some 8,000 different sales-tax jurisdictions that are constantly changing their rules and are not even aligned with zip codes. But there was ambiguity in that awkward word, nexus.
Streamlined Sales Tax Project
There have been good faith efforts to streamline the ambiguities in state and local sale tax law.
One such effort is called the Streamlined Sales Tax Project and though its adoption has been slow it could serve as a foundation for future online sales tax legislation.
The Main Street Fairness Act
In late July 2011 Senator Dick Durbin (R-Illinois) introduced a bill designed to mandate sales tax collection by all retailers if the states participate in the Streamlined Sales Tax Project.
This bill already has the support of Amazon and may be the best chance in years for serious online sales tax reform.
Here’s an excerpt from Senator Durbin’s press release:
The Main Street Fairness Act would also relieve consumers of the legal burden to report to state tax departments the sales taxes they owe on online purchases, and help struggling governors and mayors collect taxes they are already owed and therefore reduce the need to raise new taxes to fill gaping holes in their budgets.
Here are some key highlights from this recently introduced legislation:
- Certify the Streamlined Sales and Use Tax Agreement
- Provide states who choose to use it with the clear authority to require retailers to collect sales taxes already owed
- Require the Streamlined Sales and Use Tax Agreement to meet a lengthy list of simplification requirements to ease administrative burdens for sellers
- Exempt small businesses (as defined by the Governing Board of the Agreement) from collecting sales taxes
- Compensate retailers for startup administrative costs associated with collecting sales taxes
- Treat all retailers equally regarding sales tax collection
- Release consumers from their existing sales tax remittance obligations and
- Help states and localities collect billions in taxes that are already owed.
Most notably, Amazon supports this legislation and Paul Misener who is Amazon’s vice present for global policy released the following (pdf):
Amazon.com has long supported a simple, nationwide system of state and local sales tax collection, even-handedly applied to all sellers, no matter their business model, location, or level of remote sales. To this end, I am writing to thank you for your bill that would allow states that sufficiently simplify their rules to require collection of sales tax by out-of-state sellers.
This legislation may have the support of the world’s largest online retailer but it does have its opponents. Ebay along with the Direct Marketing Association oppose this legislation, both citing the excessive regulatory burdens it will place on small businesses as one of their chief grievances.
Brian Bieron, eBay’s senior director of federal government relations and global public policy released his thoughts on the legislation:
A collection of state tax commissioners have again been able to get an outdated Internet sales tax bill introduced in Congress, but we are confident that it will be rejected because it would harm small Internet retailers
Online retailers, traditional Big Box merchants, interest groups and politicians are clearly preparing their arguments for the upcoming debate regarding this new online sales tax legislation.
I highly recommend that all online retailers keep a careful eye on this bill as it makes it way through Congress.