When you buy something online, chances are that you won’t be charged a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . That’s because the U.S. Supreme Court has consistently held that states’ power to force taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collection only extends to individuals and businesses physically present in the state. If a business has no employees or property in a state, the state cannot force that company to be its tax collector (here, for sales tax).
Otherwise, the Supreme Court wrote in its 1992 case Quill Corp. v. North Dakota, businesses would face an enormous burden of complying with over 6,000 (now 9,600+) separate sales tax jurisdictions, with ever-changing bases and rates. Such burdens on interstate commerce would not be generally faced by brick-and-mortar companies (which only must deal with the tax rates and bases only where they are, not the endless places where their customers are).
States have of course not been happy with this situation, as its politically appealing to make “Amazon” or “eBay” or somebody out-of-state collect their taxes rather than directly collect them from voting residents. They often talk about the money they don’t collect. The states took two tracks: (1) some states sought to make their tax codes more uniform in the hope that it would reduce interstate commerce burdens, encouraging Congress to permit taxes on remote online sales and (2) others sought to try to collect the taxes anyway and take their chances in the courts, the so-called “Amazon” tax trend. The latter was effective at getting public notice although ineffective at any other goal: the laws passed generally put people out of jobs, reduced tax revenue, and didn’t level the playing field.
After California passed a law and Amazon began gathering signatures to overturn it, a compromise was reached that postponed tax collection while Amazon.com built a physical presence in California. The warring sides began talking and a House bill emerged that would end the physical presence rule and allow states to impose sales taxes on online commerce, so long as the states met some simplification requirements.
More work has been done and yesterday a new bill was introduced, S. 1832, the Marketplace Fairness Act. It guts the physical presence rule, but otherwise makes quite a few advances towards ensuring that states reduce the burdens associated with collecting their sales taxes. Its provisions:
- States that are currently members of the Streamlined Sales Tax Project (SSTP) are permitted to require collection of sales taxes by out-of-state companies.
- States that are not members of the SSTP pact are permitted to require collection of sales taxes by out-of-state companies if they meet the following minimum requirements:
- A single state-level agency that administers all sales tax rules, collection, and administration, including for local sales taxes in the state
- A single auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. for all state and local sales taxes in the state
- A single tax return.
- One uniform sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in the state used by state and local governments.
- Require “destination-based” tax collection for online sales (that is, collect taxes based on the delivery location, or if that’s not available, the address associated with the payment instrument, or if that’s not available, the seller’s location).
- Provide software that identifies the applicable tax rate for a sale, including local rates, and hold sellers harmless for any software errors or mistakes by the state
- Provide 30 days notice of any local sales tax rate change, or forgive sellers that don’t adjust tax rates for changes made with less advance notice.
- Remote sellers are exempt from collection obligations if they have less than $500,00 per year in sales in the United States. The limit applies to related firms, preventing subdivision to get under the limit.
- States can collect taxes unless their state supreme court or the U.S. Supreme Court finds them out of compliance with the act.
- Explicitly does not address franchise, income, occupation, or other taxes.
The main sponsor is Sen. Mike Enzi (R-WY), and co-sponsors are Sens. Dick Durbin (D-IL), Lamar Alexander (R-TN), Tim Johnson (D-SD), John Boozman (R-AR), Jack Reed (D-RI), Roy Blunt (R-MO), Sheldon Whitehouse (D-RI), Bob Corker (R-TN), and Mark Pryor (D-AR).
Amazon.com has responded favorably to the bill, although eBay is concerned the $500,000 threshold is too low. The National Conference of State Legislatures (NCSL) issued a supportive letter instantaneous with the introduction.
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