As the holiday shopping season ramps up, some view Cyber Monday as a reminder that many online retailers are not required 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, as opposed to their brick-and-mortar counterparts. Traditional retailers feel they’re at a competitive disadvantage, and states argue that they’re losing billions of dollars in revenue. But we shouldn’t lose sight of the legal foundation for protecting online businesses and the costly administrative rules that states could impose on businesses around the country.
Despite how the issue has been portrayed, the inability of states to require out-of-state businesses to collect 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. es is not a “loophole.” U.S. Supreme Court precedent in both the Quill and Bellas Hess rulings stipulate that a seller have nexus with a state before that state can require the seller to collect taxes for sales to its residents. The U.S. Constitution was adopted in large part to prevent states from arbitrarily imposing complicated rules on out-of-state individuals and businesses who may have no say in how those taxes are administered. A closer look shows the clear potential burden looming over the economy.
In an attempt to limit taxes on some items and impose higher taxes on others, state sales tax laws have a variety of different administrative rules. Applying a lower tax rate on groceries—or exempting them from taxation altogether—requires an explicit definition for food, and states have traditionally come up with different answers for that definition. Some states exempt certain clothing items from taxation. Some tax goods but not services, yet the rise of the digital economy makes it increasingly unclear where to draw that line. There are currently 10,364 state and local sales tax jurisdictions (as of 4/1/16), with more each year, and some localities even impose a different 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. than their home state.
In-state businesses already spend a fair amount of time and money to follow these rules. And while many tout Amazon as the longtime primary beneficiary of Quill, out-of-state sellers come in all shapes and sizes. Unlike their larger counterparts, these smaller businesses would have to spend a significant amount of money to comply with so many rules. Even if states agree to compensate businesses for these costs, they’re foregoing revenue in the name of maintaining complex tax regulations. State revenue concerns are understandable, but they should seek to raise that revenue in a fair, equitable, and transparent manner.
In the Quill ruling, the Court made it clear that creating a fair, simplified sales tax structure that no longer burdens interstate commerce was in Congress’s domain. After years of inactivity on finding a federal solution, states have become more aggressive in expanding their nexus rules and courts have not stood in their way. But the more states expand their ability to apply their sales taxes out-of-state without simplifying their sales tax laws, the more administrative costs and legal risks are imposed on the interstate economy. Proposed federal legislation like the Marketplace Fairness Act, the Remote Transactions Parity Act, and the Online Sales Simplification Act 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 would benefit all businesses and the states themselves.
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