In the midst of coronavirus responses and accompanying hits to state revenue, some states that had previously held out are looking to expanded online 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. authority as an additional revenue source. Tennessee Gov. Bill Lee (R) signed SB 2182 on April 1, making the Volunteer State the latest—and one of the last—states to impose obligations on marketplace facilitators. Louisiana, one of the three remaining states that has adopted remote seller requirements but does not yet have a marketplace facilitator regime in place, may join Tennessee later this year. While Louisiana’s legislative session is currently suspended, the state still has a marketplace bill on the table that could be picked up when legislators return to the state capitol.
The language in Tennessee’s SB 1282 handles these marketplace provisions with necessary care. It uses a narrow definition for facilitators, specifying that an entity must act as both the product platform and the payment processor. The law sets a gross sales threshold of $500,000 in the previous 12 months. This avoids creating a “notch effect,” where passing the threshold would impose a retroactive obligation on transactions already completed.
Notably, the law gives facilitators the option to let sellers collect and remit for themselves under certain conditions. If each of the sellers under a facilitator are registered dealers, or if a seller is registered and has over $1 billion in sales, then the responsibility to collect and remit can pass to the seller.
Louisiana’s SB 138 is somewhat different. While the bill goes a long way to give needed clarity and authority and to avoid “notch effect,” the bill uses a broad definition of “facilitator” and requires that sellers collect and remit local 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 as well as those on the state level without fully addressing some of the shortcomings of the state’s complicated local sales tax regime.
Under Louisiana’s bill, marketplace facilitators with sales exceeding $100,000 or 200 transactions in the previous or current calendar year must collect and remit state sales and use taxes each month. Facilitators must apply for a collection application within 30 days of meeting the threshold and must begin collecting within 60 days of meeting the threshold, a stipulation which avoids creating an aforementioned “notch effect.”
However, creating a safe harbor triggered by the lesser of sales and transactions thresholds instead of in gross sales alone produces complications. A small business could, for example, make more than 200 sales worth $5 each into a state, a situation in which the compliance costs could easily surpass the amount of sales tax collected and remitted, and might even exceed the company’s profits on those sales. Denominating a safe harbor in gross sales alone protects small sellers like these that might otherwise be required to collect and remit.
The bill also uses the broad definition of marketplace facilitator, capturing entities which act as either the product platform or the payment processor. While the bill specifically excludes entities that are only payment processors, this broad definition would still include sites like Craigslist and Facebook Marketplace, product platforms which have no knowledge of resulting sales and no financial interaction with the consumer at which point they could reasonably collect tax.
The bill also includes language requiring sellers and facilitators to collect and remit sales taxes on both the state and local levels. Louisiana has one of the most complex sales tax regimes in the country, as it has neither a unified 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. nor a centralized collection authority. To help mitigate this problem, the state is creating an online payment portal to give remote sellers and facilitators a central location to remit sales taxes. The state’s simplified remote seller regime, which would be available to marketplace facilitators, establishes a uniform state tax base and a standardized rate for remote sellers, but in some cases, that rate could be higher than the rate that would be levied on in-state merchants, thus giving rise to a constitutional challenge because the tax regime, at least in some jurisdictions, discriminates against interstate commerce.
Neither Louisiana’s nor Tennessee’s legislation revokes the states’ click through nexus requirements. Under such requirements, a company is considered physically present in the state if a referrer—someone who receives compensation for driving traffic or orders to the remote seller through a website link or otherwise—is located there. Such a nexus standard is a complex and inefficient workaround to a problem of physical presence that no longer exists. Keeping this standard in place would primarily burden smaller sellers, since larger ones would almost invariably be captured by the economic nexus standards put in place by marketplace facilitator provisions.
Marketplace facilitator laws make sense even without the new revenue challenges states now face. States adopting remote seller and marketplace facilitator regimes should, however, clear some of the old provisions out of their codes, and should work to ensure that their new tax regimes do not unduly burden interstate commerce.
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