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States Adopting Aggressive Online Sales Tax Laws

3 min readBy: Raymond Roesler, Isai Chavez

States for years have grappled with how to require online sellers to collect sales 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. es. With their 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. s starting to dwindle, policymakers have turned to increasingly aggressive legal interpretations to mandate 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. collection from out-of-state businesses. Unfortunately, without a simplified congressional solution, remote sellers could face a complex web of state sales tax regulations that create substantial compliance costs.

Because of these varying sales tax rules, in the 1992 Supreme Court case Quill Corp. v. North Dakota, the Court ruled that a state could only require a seller to collect taxes if it had a physical presence (or nexus) in the state. After lobbying Congress for years to address the issue, states have taken the matter into their own hands by expanding nexus laws.

Recently, some states have gone one step further by attempting to ignore the physical presence standard and instead impose an “economic presence” standard. Mostly, these new laws say that after a company passes a certain amount of sales revenue in the state, they have established an economic presence and should therefore collect sales taxes. The hope is that if enough states pursue the issue, one of two things will happen: either Congress will act on the issue or the Supreme Court will agree to hear a case that could overturn the Quill decision.

South Dakota was the first state to pass legislation directly challenging Quill, and a legal challenge is making its way through the court system. Maine lawmakers recently passed similar legislation that is now at the governor’s desk. Both states would require remote retailers to collect sales taxes if their revenue in the state exceeds $100,000. They realize that these laws violate the Quill decision and want the Supreme Court to reevaluate that case. South Dakota stated this intention in court and Maine explicitly acknowledges this in its bill. These states aren’t alone in their desire for a new Supreme Court decision. Alabama, Tennessee, and Massachusetts have sought to impose an economic presence standard through the regulatory process.

States are also starting to consider laws that go after third-party sales facilitated by marketplaces, such as Amazon and eBay. For both these companies, smaller retailers use the online platform to sell their own goods. Even if South Dakota’s economic presence law were enforced, direct sales by Amazon and sales by smaller companies using Amazon’s marketplace could face different treatment. Minnesota has adopted and Washington is considering legislation to address third-party sales by imposing collection requirements on marketplace platforms. The National Conference of State Legislatures released model legislation on marketplace platforms in January 2016.

Congressional Solution Needed

In the past few years, states have become more aggressive in expanding their nexus rules. But the more states expand their ability to apply their sales taxes to out-of-state businesses without simplifying their sales tax laws, the more administrative costs and legal risks are imposed on the interstate economy. Recognizing the administrative burden for in-state businesses, many states offer some sort of compensation for sales tax collections. Maine’s economic presence legislation also acknowledges the potential cost and would allow businesses to keep 2 percent of the sales taxes collected as compensation.

Proposed federal legislation like the Marketplace Fairness Act and the Remote Transactions Parity Act would expand sales tax collection authority, but with the requirement that states simplify their sales taxes to ensure that they do not overly burden the national economy. Finding such a solution is a good first step to protect businesses from costly compliance requirements and still allow states the ability to collect on online consumer purchases.