Sales Tax for Online Sales: Is It Time for a Change?

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Online sales tax is one of many tax-related issues that Congress is currently considering.  (Stick with us, this shouldn’t be too boring.) Under the 1992 U.S. Supreme Court decision of Quill v. North Dakota (504 U.S. 298), an online seller is only required to collect sales tax from a buyer if the seller has a physical location in the state. With online retail growing by the day, and realizing that they are missing out on substantial additional sales tax revenue, states have embarked on a quest to “kill Quill.”

Enter the Marketplace Fairness Act (MFA), introduced in the Senate on April 27, 2017. The MFA, a bipartisan proposal, would allow states to impose upon retailers the mandatory collection of sales tax for online sales. The MFA does, however, contain an exemption for small businesses. A similar bill, known as the Remote Transactions Parity Act, has been introduced in the House. Similar bills have been considered in the past, but have stalled for various reasons and ultimately never made it into law. Even SCOTUS seems ready to see the tide turn. In 2015, Justice Kennedy recognized the effects of evolving technology on the state of retail and suggested that the Supreme Court should reexamine Quill.

For larger online retailers who are forced to work through the web of varying state and even municipal laws, compliance with a single federal law would likely prove less burdensome. And more populous states stand to gain substantial income from additional sales tax revenue. The more rural states seem to appreciate the MFA as a solution to their currently limited ability to track all the online sales that take place within their states. It is not clear yet how the logistics of the federal law would play out or how much states would actually benefit from collection of additional tax. A 2016 study found that customers spent 8.3% less on products after a sales tax was put into effect, with the greatest decrease in spending (11.4%) coming from high-cost items ($250+). With the ease of online shopping though, many online shoppers might not even realize whether or not their orders are currently subject to sales tax.

Some states have taken matters into their own hands, passing their own laws for collection of taxes for online sales situations not directly addressed by Quill. In March 2016, South Dakota passed a law requiring online stores with sales in the state of more than $100,000 or 200 transactions to collect sales taxes. A group of online retailers responded by filing suit, which is still pending. Alabama and Tennessee are also involved in similar litigation.  The MFA, however, could resolve some of the issues underlying this litigation. For example, because the South Dakota litigation is based on a law that requires online stores with a minimum number of total sales in the state to collect sales taxes, the MFA’s mandatory collection of online sales taxes would overturn Quill and nullify the issue of whether the South Dakota law is contrary to Quill.

The MFA brings with it the potential for significant changes for states and retailers alike.  We will continue to track the legislation and provide updates as events develop.

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