This coming holiday shopping season could be the last one in which online shoppers avoid their states' sales taxes.
Tax software maker and publisher CCH reports that of the 45 states that have a sales tax, 16 have enacted or have legislation pending that would require online retailers to collect sales and use tax or, at the very least, to more strongly urge in-state customers to pay use tax.
And Washington, D.C., is getting more involved in the issue, too. This week's Follow-up Friday focuses on another piece of federal legislation that would require states to collect sales tax from remote sellers.
The Marketplace Equity Act (MEA) of 2011 (H.R. 3179), which reflects the tax wishes of the Retail Industry Leaders Association, was introduced last week. It would require sellers to collect sales and use tax for states in which they lack a physical-presence nexus.
Unlike the previously introduced Main Street Fairness Act, this latest online tax measure would not require a state to conform to the Streamlined Sales and Use Tax Initiative (SSTI) in order to receive collection authority.
The SSTI is an effort to simplify state sales tax so that there are common definitions for taxable products and uniform procedures across the states. So far, 24 states have passed laws to abide by the streamlined tax rules.
Marketplace Equity requirements: Under the Marketplace Equity Act, a state could require remote sellers to collect tax for online purchases shipped into that state as long as the state's law provides for some minimum simplifications. They include:
- A small-seller exception for remote sellers with gross annual receipts nationwide of $1 million or less, or in the state of $100,000 or less;
- A single tax return for use by remote sellers and a single authority in the state with which the return must be filed;
- An identical tax base and exemptions throughout the state for remote sellers; and
- A rate structure for remote sellers.
The three acceptable rate structures for remote sellers would be:
- A single statewide blended rate that includes both the state rate and local rates;
- A maximum state rate, exclusive of tax imposed by local jurisdictions; and
- A destination rate, which would be the sum of the state rate and the local rate into which the sale is made.
Bipartisan support: Another difference between the Marketplace Equity Act and the Main Street Fairness Act is that the most recent bill has bipartisan support. The Main Street bill was sponsored only by Republicans.
Rep. Steve Womack, a Republican from Arkansas, and Rep. Jackie Speier, a California Democrat, introduced the Marketplace Equity Act. Original Republican cosponsors include Mario Diaz-Balart and Dennis Ross, both of Florida, John J. Duncan, Jr. of Tennessee and Ted Poe of Texas. Democrats supporting the bill are Carolyn B. Maloney of New York, Betty McCollum of Minnesota, Brad Miller of North Carolina and Peter Welch of Vermont.
"The intent of this legislation is not to be instructive, but instead to close a long-standing loophole that puts America's brick and mortar businesses at a competitive disadvantage," Womack said in statement announcing the bill.
"The death of small businesses on Main Street can be attributed in part to the consumers who will visit the store test out the equipment, get advice on products like TVs and computers and cameras and bicycles, and then find and buy the item online, sometimes right on their mobile phone while still standing in the store," said Speier.
Not a smooth, or fast enactment path: But despite a broader base of support, don't expect quick action on the bill.
Daniel Schibley, CCH Senior State Tax Analyst, predicts that while the Marketplace Equity Act could have a hearing before next year, chances of passage in 2011 are remote. There is a long-shot chance, says Schibley, that it could be considered by the deficit-reduction super committee.
In the longer-run, however, shoppers better start budgeting for online sales taxes.
"Whether legislatively compelled at the Federal or state level or through online retailers seeing it as inevitable, the trend is moving toward more online retailers collecting sales and use taxes," says Schibley.
Amazon already has cut deals with states to postpone sales tax collection, most notably in California, giving the giant online retailer time to adjust to state sales tax collection.
And cash-strapped states will become bolder in pushing for this revenue stream.
What's on state's online tax books? Schibley says state legislation on seller collection of sales taxes tend to fall into four general categories:
Click-through-nexus: These rules generally require an online retailer to collect sales tax if it solicits sales with links on an in-state business' website and pays those website operators a commission. The argument is that this arrangement is akin to having an in-state sales force. Eight states have passed click-through-nexus legislation: Arkansas. California, Connecticut, Illinois, New York, North Carolina, Rhode Island and Vermont. Click-through-nexus bills also have been introduced in Massachusetts, Michigan, Pennsylvania and Tennessee.
Affiliate-nexus: These rules generally apply if the online retailer has an affiliation with a company doing business in the state; for example, a sister company or subsidiary, selling goods under a similar business name, or sharing in-state employees or facilities. Six states have recently enacted affiliate-nexus laws: Arkansas, California, Colorado, Illinois, South Dakota and Texas.
Reporting Requirement: These rules require a retailer selling into the state but not collecting sales tax to send the state an annual statement of everyone in the state it shipped to and the value of those purchases. The state can then pursue the individual in order to collect the use tax. So far only Colorado and Pennsylvania have these rules and the Direct Marketing Association is challenging the Colorado law in Federal court.
Notification Rules: These rules require online retailers to place a notice on their website informing customers they are required to pay the use tax. The four states with notification rules are Colorado, Oklahoma, South Dakota and Vermont.
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