Online Tax Reform is under increasing pressure

The states are putting pressure on Congress to reform online sales tax. Online sales tax is currently governed by the same rules as catalogs, mail and phone orders. The U.S. Supreme Court ruled that remote retailers are exempt from tax collection in Quill v. North Dakota in 1992. This was almost 25 years ago. A “nexus” is an entity that has a physical presence. It can be anything, including a storefront, office or warehouse.

Because it would increase funding, both local and state governments support a more organized online tax system. The current law only requires retailers to collect taxes from customers where they have a physical location. If the tax is not collected at purchase time, but the consumer lives in a state with sales tax, then the consumer must report and pay that sales tax. This is almost always the case. Internet Retailer projects that the state and local governments will receive $15 billion more in sales tax if all orders placed online were subject to tax. Local and state taxes are collected and charged at the store and then turned over to government. This issue is more complicated for online retailers that deal with customers all over the country.

When the original ruling was made in 1992, computers were rare in everyday retail use. It would have been difficult to find mail-order or telephone retailers that could handle all 50 state taxes. The technology landscape has changed dramatically with the advent of ecommerce and computers. The technological advances have resulted in an increase of sales but not taxes over time. Many states consider this lost revenue. The argument is that online retailers will be able to easily recalculate their taxes using software and technological advancements, and that today’s ruling doesn’t accurately reflect the reality.

Online retailing generates at least $4 trillion annually. This figure is much higher than what was made from mail and remote phone orders back in 1992. According to Forbes “U.S. Retail e-commerce sales in the second quarter 2016, adjusted for seasonal variations, reached a staggering $97.3 billion. States are losing millions in sales tax revenue every year due to the fact that many online retailers don’t collect sales tax. This could be because they aren’t required to, or because they don’t want to.

What’s at stake?

This issue has many moving parts. Online retailers would need to do some legwork if the law were changed. There are thousands of tax codes and rates that apply to different areas in the country. Online sellers may need to be able to charge the appropriate rates and handle them appropriately. A software system that handles this automatically is the best solution. Retailers may be partially or entirely subsidized by this system. The software is not perfect and requires a lot of learning. There is also a learning curve for customers who are used paying or not paying certain taxes with specific stores.

Online retailers will be required to collect sales tax in each region where they ship product. E-retailers can also be audited by local governments. Although the likelihood of independent retailers being audited is slim, it’s still possible.

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Marketplace Fairness Act

The Marketplace Fairness Act, the current proposed legislation in the U.S. Congress, is this bill. This legislation would allow states to collect sales tax and use tax from remote sellers who don’t have a physical presence or “nexus” in their state. However, the state must simplify its tax laws in accordance with the Marketplace Fairness Act. The exemption would apply to small businesses that have less than $1,000,000 in remote sales annually.

Similar bills have been introduced before. They have either expired before being voted on or lost momentum in Congress. Although it is not clear if anything will be resolved with the current legislation, mounting pressure from local governments suggests that a decision is likely for 2017. Keep watching