Written by Scott Scheef, Staff Accountant
E-commerce and the state government’s effort to monitor and tax internet-based transactions have existed nearly as long as the internet itself. In the 1992 United States Supreme Court case of Quill v. North Dakota, the court ruled that a state cannot force an online retailer that is lacking physical presence in its state to collect and remit sale tax. However, the Supreme Court stated “the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”
In the past 20 years e-commerce sales have grown exponentially, growing the estimated aggregate lost tax revenue from approximately $3.2 billion in 1992 to an estimated $23 billion in 2012. In addition to lost tax revenue, many traditional, brick-and-mortar retailers have claimed that e-commerce sales have given an unfair advantage to online retailers. Many traditional retailers have also joined the fight for reform after stagnant sales and recent increases of “showrooming”, which is when a customer will visit a store to physically shop and then purchase the same merchandise online where they are not charged tax.
Backed by the support of many states and local governments, traditional retailers, retail trade associations, and various labor unions, the United States Senate passed the Marketplace Place Fairness Act of 2013. Previous efforts to implement taxation of e-commerce have not been supported by large online retailers; however, Amazon.com and eBay have overall been supportive of the new legislation.
The proposed Act would forever change the way many business have treated sales tax nexus, or the requirements to determine whether a business is required to file returns within a given state. In the past, nexus has been determined by multiple factors depending on the individual state; but a majority of states have regulations requiring businesses to collect and remit sales tax if it has a physical presence in the state. A business has physical presence if it has a physical location, resident employees, or business property within any given state.
The new proposed regulations will eliminate the physical presence nexus test, instead requiring retailers to collect and remit sales tax to any state in which it has “remote sales.” A “remote sale” is defined as a sale a retailer generates that the retailer would not have a legal liability to collect and remit sales and use tax on.
The proposed regulations allow for a small business exception that would allow businesses with “remote sales” of $1 million or less in the preceding year to not collect and remit sales and use tax in states where it does not have a physical presence. Once the retailer’s sales reach or exceed the $1 million annual threshold in remote sales, the retailer has an obligation to collect and remit in all states that it transacts business.
It should be clarified that although a business may have nexus within a state for sales and use tax purposes under the Market Place Fairness Act, it does not subject the retailer to other taxes within that state (such as income, occupation, franchise, etc.).
The proposed regulation will require some changes to the way that states handle sales and use tax, requiring states to simplify its tax code, if not done so already. Twenty four states have become members of the Streamlined Sales and Use Tax Agreement (SST), which would automatically require remote sellers over the $1 million threshold to collect sales and use tax. These states include Nebraska, Iowa, Kansas, Colorado, North Dakota and South Dakota, to name a few. States that are members of the SST would have the authority to require remote sellers to begin collecting and remitting the tax 180 days after the state gives notice of its intention to exercise its authority under the new law.
States electing to enforce the Market Place Fairness Act would have numerous procedures and processes that must be restructured before being allowed to exercise its authority; including, but not limited to, providing a uniform state and local tax base, a rate and boundary database, information indicating the taxability of products and services (including product and service exemptions), and software to calculates sales and use taxes on each transaction and file returns.
The current legislation was initially introduced into both the United States House of Representatives and the United States Senate on February 14, 2013. The Act was subsequently reintroduced in the Senate on April 16, 2013 before being passed on May 6, 2013 with a vote of 69-27. The House of Representatives has yet to vote on the current bill; however, there is speculation that the bill will not pass in its current form. The bill has been forwarded on to the House Judiciary Committee, where ultimate jurisdiction over the bill remains.