Tax Analysts Blog

Waiting on the Court to Figure Out How to Tax Remote Sales

Posted on Jan 13, 2016

State officials have been struggling to tax remote sales for more than a decade. Congress and the U.S. Supreme Court have been called upon to act, but seem unable or unwilling to address the issue. State officials’ patience is waning, though, and that could lead to more uncertainty and complexity for retailers and consumers.

The e-commerce business model has been a tremendous success. It has opened to retailers a vast market of previously unreachable customers by enabling retailers, even very small ones, to operate in one state but have customers in other states or even other countries. The problem presented by this for state officials is simple, yet hugely significant: If a remote retailer has no physical presence in a state, the retailer is not obligated to collect and remit that state’s sales tax. Although customers are technically obligated to pay use tax on online purchases, those remittances are rarely made. The result is that states fail to capture sales tax revenue on many out-of-state sales by remote sellers.

State officials have never been willing to simply roll over and accept a loss of sales tax revenue. Instead, they explored new methods and arguments for collecting sales tax from remote retailers. For example, there was the Streamlined Sales Tax Project. States that joined the Streamlined Sales and Use Tax Agreement agreed to take steps toward simplifying and modernizing their sales and use tax administration in an effort to reduce the burden of sales and use tax compliance. While those are laudable goals, it is arguable how successful they have been in practice.

Given the hesitation among some states to join the streamlined agreement, some enacted vendor presumption laws or click-through nexus laws. New York was the first to enact a click-through nexus law. New York argued that if a remote seller has an affiliate marketing or similar program, the retailer’s in-state affiliates satisfy the physical presence requirement and create sales tax nexus for the seller. Today, at least 17 states have enacted click-through nexus laws.

The streamlined effort, click-through nexus, and everything else states are trying have a common thread -- they are attempts to force remote sellers, which lack physical presence in the taxing state, to collect and remit sales tax. But what states are really doing is making it nearly impossible for retailers to comply with the patchwork of laws, policies, and systems. And it could get worse.

At a conference of the National Governors Association last week, Virginia Gov. Terry McAuliffe (D) said governors were calling on Congress to act by passing the Marketplace Fairness Act, federal legislation that would enable states to require remote retailers to collect sales tax. McAuliffe added that if “Congress does not act, we in our states will act on our own.” It seems unlikely at this point that Congress will pass the Marketplace Fairness Act.

In November 2015, at a meeting of the National Conference of State Legislatures, Utah Sen. Curt Bramble (R) asked if it would be appropriate for states to draft legislation this year that was designed to present a constitutional challenge. Other states are thinking along the same lines.

What this really means is that retailers and state officials are giving up on Congress and instead hoping that the U.S. Supreme Court will act to provide clarity and uniformity. It could be an interesting year.


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