E - Commerce tax Policy Project

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Current State of U.S. Law

      Of all the major global trading parties, the United States is the only one that relies heavily on sales taxes for tax revenue.  All U.S. states charge sales taxes on goods except Alaska, Delaware, Montana, New Hampshire and Oregon.  Additionally, cities and counties are empowered by their states to add their own sales taxes, usually up to a capped amount. There are as many as 7500 different sales tax jurisdictions in the United States. Of course, all these states and localities have their own exemptions.

 
 
Sales Taxes in the U.S.

     

    ...<continued> Of all the major global trading parties, the United States is the only one that relies heavily on sales taxes for tax revenue.  All U.S. states charge sales taxes on goods except Alaska, Delaware, Montana, New Hampshire and Oregon.  Additionally, cities and counties are empowered by their states to add their own sales taxes, usually up to a capped amount.There are as many as 7500 different sales tax jurisdictions in the United States. Of course, all these states and localities have their own exemptions

    For example, states often exempt food purchases from sales tax.  But some states limit this exemption to food bought in grocery stores, not restaurants. It can be a demanding legal obligation for vendors to understand and correctly collect the tax of any one jurisdiction, much less 45 states and 7500 localities. This is why distance sellers who advertise online and in catalogs resist collecting sales taxes for all the places where they deliver goods.

                Often misunderstood in the sales tax environment is the obligation of consumers to pay tax, even if a vendor does not collect sales tax.  Actually, buyers are obligated to pay a USE tax, which is explained under Use Taxes.

     

Nexus

 

The commerce clause of the U.S. constitution empowers the FEDERAL government to regulate interstate commerce.  Courts have interpreted thethe commerce power as a prohibition on the states and localities from unduly burdening interstate commerce with local mandates. MORE

 

Tax Collection Environment Today

 

Collection from Vendors

Collection from Individual Taxpayers

 

Service Taxes

 

Sales taxes on services have never been as widely employed in the United States as the tax on sales of goods. Nevertheless, taxes on services are a major issue in the Internet tax debate since Internet access, Internet advertising and transactions related to web site space all are service transactions that previously were non-existent in commerce. Thus, these new services could provide completely new sources of tax revenue that previously have not been available to state governments.For now, Congress has preempted any such taxation attempts by the states, under its constitutional power to control interstate commerce. MORE

 

For Instructors

 

Teaching Symposium



 

<continued> ... Every state that passes a sales tax law also imposes a corollary USE tax.  A use tax is applied to goods purchased in another state and brought back to the buyer’s home state for use.  If sales tax was not collected in the purchasing state (the “point of sale”) the buyer owes the use tax on the item to the home state.

States adopted use taxes to discourage buyers from crossing state lines to make purchases where they would not be taxed at the point of sale.  Of course, there are only 5 such states now, so the basic premise of the use tax is inapplicable in most of the United States today.  Also, with online transactions, buyers “cross state lines” routinely to make purchases, often with no idea that they are obligated to pay the use tax to their home states.

When a buyer makes a purchase online or over the phone from a catalog vendor, the vendor usually does not collect any sales tax.  Why not?   The legal answer is summed up in one word, NEXUS.

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<continued> ... The commerce clause of the U.S. constitution empowers the FEDERAL government to regulate interstate commerce.  Courts have interpreted thethe commerce power as a prohibition on the states and localities from unduly burdening interstate commerce with local mandates.

Is it an undue burden on interstate commerce to require an out-of-state vendor to collect sales tax on the goods it delivers to another state.  This question has twice come before the U.S. Supreme Court. In 1967, the U.S. Supreme Court held that a seller is not subject to a state's tax collection requirements if the seller’s only "nexus" with that state was through deliveries of goods to an address there. (National Bellas Hess).  Thus, sellers who market across the country through catalogs or web sites are shielded from any obligation to collect and remit sales, except on transactions delivered in their own home state.

Retailers, who sell the same goods but must collect the taxes from their customers, widely object that this disparity creates an unfair competitive advantage for direct marketers. Nevertheless, the Supreme Court reaffirmed the conclusion in 1992 (Quill case).

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  • Tax Collection Environment Today

 

  • Collection from Vendors

    Many vendors have both an online presence and a retail presence. So an online purchase from Sears.com or BestBuy.com will always include sales tax, because those organizations also have “nexus” with all 50 states because of their retail stores nationwide.

    Other online vendors have entered agreements with states to collect sales taxes even though they lack nexus with the states.  These agreements are usually facilitated through a consortium of states known as the “Streamlined Sales Tax Project.” According to Congressional testimony, these sellers voluntarily collected $88,958,093 in sales tax for the 2007 fiscal year. (Testimony of Joan Wagnon, President of the Streamlined Sales Tax Governing Board and Secretary of Revenue for the State of Kansas, p 3,  http://www.streamlinedsalestax.org/DOCUMENTS/Joan's%20Final%20Testimony%20on%20SST%20to%20Congress%20120607.pdf)

    The Streamlined Sales Tax Project takes a multi-pronged approach to encourage sales tax collection by vendors.  One approach of these states is to simplify the tax collection burden by standardizing definitions in states’ tax laws.  This will ease the problem of varying exemptions from state to state.  Another approach simplifies the administrative processes for compliance with standardized forms.

    Another approach is technological.  The initiative certifies tax administration software for vendors to use. 

    The states have a separate web site for vendors. https://www.sstregister.org/sellers/Entry.aspx  This site also includes a link for all the participating states.

    A study of the Project’s website suggests why simplification is so difficult. For example, the site includes 24 “Issue Papers” detailing various legislative or administrative tax compliance issues that the participating states needed to reconcile among themselves.

    These are some of the achievements of the group:

    • single, simplified report form,
    • electronic registration and reporting,
    • uniform product definitions,
    • certified service provider for collecting and reporting to the states,
    • uniform sourcing and rounding rules,
    • elimination of caps and thresholds,
    • consistency between local and state tax bases

     

    Testimony of Joan Wagnon, President of the Streamlined Sales Tax Governing Board and Secretary of Revenue for the State of Kansas, p 4,  http://www.streamlinedsalestax.org/DOCUMENTS/Joan's%20Final%20Testimony%20on%20SST%20to%20Congress%20120607.pdf)

    Ultimately the states hope to convince Congress to repeal the court-imposed nexus standard for tax collection and to establish a uniform standard by which states could require tax collection from distance sellers.  These states would readily accept a federal standard that would exempt certain vendors whose sales to a state fell below a certain threshold.

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  • Collection from Individual Taxpayers

    States are trying various tactics to collect use taxes on distance purchases directly from consumers. Numerous states have added use tax calculations as part of the state income tax form. These states often provide an optional table for the filer to determine use tax liability based on income.  This approach eliminates the need for taxpayers to keep track of all online purchase and the necessary tax for the year.

    The advantage of this approach is that consumers cannot ignore or “play dumb” about the use tax obligation and still validly file their state income tax forms. Tax filings require affirmation under penalty of perjury that the forms are true and complete.  A consumer who made online or catalog purchases cannot bypass the use tax portion of the state income tax filing and legitimately sign off on that filing.

    Use tax compliance could become an easy audit trigger.  Marketing research could be used by the states to create a profile of the typical taxpayer who would have distance purchases above a certain amount.  That profile would indicate the annual income of such a buyer.  Any tax filers who fit the profile but had not completed the use tax portion their income tax forms could be audited, and not just for use tax compliance.

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<continued> ... Sales taxes on services have never been as widely employed in the United States as the tax on sales of goods. Nevertheless, taxes on services are a major issue in the Internet tax debate since Internet access, Internet advertising and transactions related to web site space all are service transactions that previously were non-existent in commerce. Thus, these new services could provide completely new sources of tax revenue that previously have not been available to state governments.For now, Congress has preempted any such taxation attempts by the states, under its constitutional power to control interstate commerce.

Beginning in 1998 with the Internet Tax Freedom Act, Congress has imposed a national moratorium on any new Internet service taxes.  This law originally had a 3-year limit for the state tax ban.  But every time the moratorium is set to expire, Congress extends it a few more years. In the process, governors and state legislatures lobby that they should be allowed to consider adopting these new service taxes.  At the same time a few federal legislators advocate for a permanent federal ban on internet service taxes. In the end, Congress continues to forestall any final decision by extending interim moratoria.  The current federal ban on state internet service taxes is set to expire November 1st 2014.

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© 2008 Larry Garrison & Rita Marie Cain

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