In the wake of the 2018 South Dakota v. Wayfair case, states were quick to take advantage of their new authority to 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. online sales. By the end of 2019, all states with sales taxes except Florida and Missouri had adopted remote sales regimes, whether by legislation or revenue department regulations.
After its notable wait, Missouri now has a chance to join the ranks of states collecting sales and use tax from online sales. Under SB 529, remote sellers (effective Oct. 1, 2020) and marketplace facilitators (effective Jan. 1, 2022) would be required to collect and remit sales and use taxes when they make $100,000 or more in sales into Missouri.
It appears that letting the situation simmer for a while has done Missouri some good: The proposed legislation avoids many of the pitfalls that often accompany taxing internet purchases. However, legislators should repeal the state’s click-through nexus rule with passage of this bill. In addition, they should consider a higher threshold than $100,000.
The bill specifies that sellers and facilitators are liable to collect sales and use tax if they surpassed the $100,000 threshold in the 12 months preceding the current quarter. There are two benefits to point out here: 1) This lookback technique avoids “notch effects,” where passing the threshold would impose a retroactive obligation on transactions already completed, and 2) the threshold is denominated in gross sales only, which protects small sellers that may have been required to collect and remit under a transaction threshold.
This $100,000 is the same sales threshold set in place by South Dakota. While South Dakota accounts for only 0.3 percent of national consumption in the US, Missouri accounts for 1.8 percent. The Show Me State would do well to consider a threshold that takes this difference into account, as keeping the same low threshold would capture smaller sellers in Missouri than it would in South Dakota.
The bill includes a requirement for the creation of a mapping system to show all sales tax jurisdictions and their respective sales and use tax rates. Sellers would use the nine-digit zip codes of their customers to determine what tax to collect. If only a five-digit zip code is available, the seller would then collect the lowest sales and use rate within that zip code area.
The bill uses the narrow definition of “marketplace facilitator”: the entity must act as both the product platform and the payment processor. This avoids accidentally including marketplaces like Craigslist (which only provide the product platform) or capturing entities like credit card companies (which only process payments). The bill doubly covers its bases by specifying that financial institutions are not included.
Notably, SB 529 allows the department of revenue to grant a collection waiver for marketplace facilitators if all of its sellers are already registered 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. .
Missouri currently enforces “click-through” nexus, where 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. Missouri’s legislation does not currently include any changes to the state’s click-through requirement. Failing to remove such a standard would primarily burden smaller sellers, since larger ones would almost invariably be captured by SB 529’s economic nexus standards.
In short, Missouri’s SB 529 would lay the groundwork for a clear and responsible sales tax collection regime, but the state should take care to repeal its click-through nexus law and consider a gross sales threshold that takes the size of the state’s economy into account.
For more discussion on the issues accompanying online sales taxes, take a look at our recent report.
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