Sales Tax

Last week, the Supreme Court issued cert in the case of South Dakota v. Wayfair, Inc.  The question before the Court is whether it should abrogate its holding in Quill Corp. v. North Dakota which re-affirmed the Court’s holding in Nat’l Bellas Hess, Inc. v. Dep’t of Rev. of Ill. that the dormant commerce clause prohibits a state from requiring retailers to collect sales taxes on sales into a state unless the retailer is “physically present” there. In Quill, the Court held that “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”

Given the massive shift to online purchasing since Quill, it would seem to be sensible to all interstate sales even if the sellers lack a physical presence in the taxing state. Whether this is sufficient to change the Constitutional doctrine set forth in Nat’l Bellas Hess and Quill is a question that I won’t opine on here. However, there would seem to be no question that, without a national framework, there will be practical problems in imposing and collecting sales taxes on interstate sales.

There are about 10,000 different jurisdictions that impose sales taxes.  Thus, sellers are likely to face problems in effecting compliance. As noted by Avalare:

ZIP codes are commonly believed to be the basis of a sales tax jurisdictional boundaries and rates. . . .Sales tax is imposed by local and regional governments and have no direct correlation between ZIP code boundaries and tax jurisdictions.

However, without a national framework, taxing authorities will have to deal with significant enforcement problems:

We can assume that large retailers will do their best to honestly comply with sales taxes imposed by any of those 10,000 jurisdictions. But what about smaller retailers?  Take a look at this story as to how easily one one can become a “drop-ship” entrepreneur.  Absent some uniform system of compliance enforcement, smaller retailers will simply ignore the collection of sales taxes on their sales. (While there are provisions in most sales tax statutes that impose liability for sales taxes on so-called “responsible persons,” the practical ability to collect from responsible persons who are outside of the taxing authorities’ actual location is zero.)

There is no uniformity among sales tax statutes as to what items are taxable and what items are exempt. To cite a fairly trivial example, some states exempt their own state flags, but not the flags from other states.  More significantly, grocery items are sometimes taxed and sometimes exempt.  (At one time, bibles and other religious articles were often exempt, but these exemptions have been successfully challenged on First Amendment grounds.)

The point is that, even if the Supreme Court overturns existing precedent, there will have to be Congressional legislation to relieve sellers from compliance burdens and to give state and local jurisdictions the tools to enforce their tax impositions.


16 thoughts on “Sales Tax”

  1. Oddly enough, numerous companies have managed to deal with this problem without, well, problems. You'll note that if you purchase from Apple online, you'll be charged the correct tax rates because they have a retail presence pretty much everywhere. Same for Target and Walmart. This isn't some 'unsolvable' issue. Hell, it could become a profit center for companies already doing it. "We provide tax calculations for a .1% share of sales."

    This isn't some insoluble problem, merely one that many don't want to solve.

    1. Big companies like Apple or Amazon aren't going to have any issue with it. It's small and medium-sized companies who will take it in the neck.

      If someone wants to start up a small business selling things online, a law requiring that they properly track, calculate, collect and remit sales taxes to thousands of individual taxing jurisdictions all over the country means they may as well not even start. The barrier of entry is far too high for all but the most well-capitalized startups.

      Also, giving states the power to pursue and prosecute out-of-state businesses that they believe have not properly collected and remitted tax revenue for items sold in their state is opening up a huge can of worms. Some taxing authorities, like the one here in New York State, are notorious for pursuing businesses for non-payment of sales taxes on the flimsiest evidence. I have a friend who is a tax attorney that handles these types of matters and some of the cases are so ridiculous I can hardly believe they're true.

      The fact is, this is still a solution in search of a problem. Online retail is still a small part of total sales and the big players, like Amazon and Apple, already collect sales taxes for all or almost all US states to which they ship.

      1. Surely an enterprising start-up can market a national sales tax program that can be appended to a vendor's shopping cart.

        1. There are already plugins and services that do some of that for you. As noted in the article, they work by zip code and taxing jurisdictions aren't neatly divided by zip code. That still leaves out the problem of tracking, filing and remitting the taxes. Looks like in about 24 states you can have some other service do this for you.

          Even if you could get all the states on board with this, and that would require changes in state law, that's still a non-trivial burden for small businesses who may not even have anything like shopping cart software. Many small, online shops just have a list of things for sale and a PayPal "Buy Now" button.

          1. Many small, online shops just have a list of things for sale and a PayPal "Buy Now" button.

            Gee, now where would they make contact with a large company that already deals with payment transfers and certainly has the resources to sell a sales tax service to their many, many small vendors…I can't fathom.

            This is, as I've stated, a solved problem, since clearly large companies can do this without issues.This kind of thing is precisely what PayPal was founded to do. They're already handling the transaction, with an address attached. Anecdotal evidence about one state being abusive in collecting taxes is not really a sufficient argument against the huge number of brick&mortar small businesses who are harmed by online sellers able to undercut their prices by not collecting sales taxes.

        2. Or Apple could do it, since they already have it in place.

          Enter addresses and amounts and get back a list of payments due.

      2. A reasonable alternative is to require small companies to charge a default rate of, say, 6%, and track ZIP codes. The money collected would then be distributed, pro rata, to the states.

        Not perfect, surely, but a sensible compromise, it seems to me.

        This wouldn't apply to the big guys, who, protests notwithstanding, are perfectly capable of calculating sales taxes correctly.

  2. It sounds like this is something that Congress could and should have fixed a long time ago.

  3. I am crying crocodile tears over not paying the regressive sales tax, yet another in a long line of regressive taxes. Here is an idea: just drop them all.

  4. The whole "10,000 jurisidiction" thing is incredibly misleading. While it may be literally true, there are about 1/100th of those that administer sales and use taxes. That's a pretty hefty distinction. Small retailers are not going to be filing 10,000 tax returns every month, nor do they need to be up on the law in 10,000 jurisdictions. The differences, to the extent they exist, are almost completely with rates, and in practice, the penalties for failure to accurately comply are essentially nil given a good faith effort to collect the proper rate. The burdens for compliance are wildly overstated. And from a compliance standpoint, most smaller retailers won't even have to file every month. They'd probably annual, semi-annual, or quarterly filers based on sales volume. It's not nothing, but the "10,000 jurisdiction" thing was created to sound misleading.

    It's also important to note, at least from a legal standpoint, that almost of none (well, entirely none) of the taxes that would be collected and remitted under a change to "Quill" are sales taxes. They're use taxes, and they're taxes that the purchaser already owes, and in many cases just doesn't pay. Most of the time it's just out of ingorance (you'd be shocked at how many tax professionals start their careers not even knowing that use taxes exist). A change in the law doesn't create any new taxes, it just creates a burden on the seller to collect and remit taxes where the burden is currently on the purchaser. Unless you live in one of five states, you could never buy anything from Amazon or Overstock "tax free". You've always owed tax on it. You probably just never actually paid it.

    I've been in this line of work for about 15 years. I'd be happy to answer any questions. Almost everything you're reading online about this is not giving you the entire picture (likely because it's kind of boring, but still).

    1. I don't know about Overstock, but on Amazon, Amazon does not collect tax on sales that are shipped direct from the supplier.

      I don't oppose the imposition of sales taxes on interstate sales. However, there are obvious compliance issues that cannot effectively be addressed via judicial intervention alone. My guess is that SCOTUS will reverse its holding in Quill and that, subsequently, Congress will step in to rationalize the system.

      1. It's up to the supplier to apply tax to those sales. They have the ability to do so, but perhaps not the sophistication, though that's not really an excuse for failure to comply with the law. They each have nexus in every state where Amazon may hold their inventory. There's a lot of information out there if you google "sales tax" and FBA.

        Well again, let's be clear. Tax is already imposed on interstate sales (they're correctly called use taxes, either consumer use or seller's use). Tax is imposed on virtually all sales of tangible personal property regardless of jurisdictional issues, unless you're in New Hampshire, Oregon, Montana, Alaska, or Delaware. The issue in Quill is not the imposition of the tax, but on whom the collection/remittance obligation rests. Quill says that a state cannot require a retailer to collect and remit on the state's behalf unless the retailer has sufficient nexus, but regardless, there is still a tax imposed on that transaction. But from a practical standpoint, it's much easier for the state to require a retailer with 1,000 customers to collect and remit the tax than it is to get the tax from each of the 1,000 customers.

        The thing with Quill is that the Supreme Court ALREADY set it up so that Congress could fix it. They basically said "we can't change the nexus standards, but it's totally OK for Congress to do so". 25+ years later Congress hasn't done anything. The due process and commerce clauses haven't changed, so I'm curious to see, if the Court changes it's original holding, how exactly they go about doing it.

        1. On the subject of use taxes, I am reminded of a long-ago interview with the Commissioner of Revenue in what I think was New York.

          He was asked whether many people filed use tax returns.

          "Well," came the response, "I happen to know who the seven most honest people in New York State are."

  5. VAT is less distorting than a sales tax. The EU shows that it is possible to have a pretty uniform VAT with rates and exemptions varying by country. The single market imposes practical limits on variation, but overall the scheme seems to work. VAT is more demanding on vendors in terms of paperwork, but really it's information they should have in their own interest.

  6. Not collecting tax on out of state sales is reasonable to avoid interfering with interstate commerce besides the practical benefit of avoiding an administrative headache.
    Use taxes are essentially on interstate commerce, so I'd like to see them declared unconstitutional, rather than just getting ignored in practice.

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