Is it time to end the sales tax exemption for online retailers?
The background is that online retailers are only required to collect sales taxes in states in which they have what are called “nexuses”, i.e. physical premises. That’s a benefit they’ve been given under law. It applies both to Amazon and to the smallest e-tailer.
Should that exemption be eliminated?
At least in Amazon’s case, this exemption appears to be quickly fading away.
Thanks in large part to its expansion of logistical facilities and warehouses as part of its effort to speed up delivery time — which now includes same-day or next-day delivery for Prime customers in many parts of the country, — Amazon has a physical presence that extends far beyond its roots in Seattle. This means it now has to collect sales tax in each of the states in which it has a presence, I believe. The same is true of other major online players such as WalMart.
As for your broader point, I think we’re close to the point where the exemption for online retailers, which advocates have long argued was intended to encourage the growth of this segment of the economy, needs to be reconsidered in the light of simple fairness.
I do think, though, that there needs to be some recognition of the fact not everyone selling goods over the Internet is an Amazon or Walmart. Small businesses that do a small amount of business online perhaps ought to be exempt from what would otherwise be the onerous task of keeping track of state and local sales tax rates in jurisdictions they have no connection to other than the fact that they may have shipped a few items there. There was legislation before Congress several years back that provided that businesses would be exempt from sales taxes only if the amount of business they did outside their home state stayed below a certain limit. I can’t recall at the moment what that limit was, but at the time I recall thinking that it seemed like a reasonable number.
The concept of nexus extends beyond just physical presence, be it manufacturing or warehousing. Some jurisdictions interpret nexus to include installation activity and maintenance, or even routine visits by distributors or sales reps, and some forms of advertising. What a mess. As Doug pointed out, some clarification, and concept of threshold activity is needed. It was very gray the last time we faced this issue, which came up in diligence in a potential acquisition. Deloitte, and the local yokels, couldn’t resolve it.
Interestingly, Doug also notes that the exemption was designed to encourage business activity. Someone needs to set him straight, taxes don’t matter………..
But seriously folks….
It seems only equitable to have similar tax treatment irrespective of mode of sale or distribution.
It’s even more complicated than that. Most e-tailers nowadays haven’t cobbled together their own sites from scratch. They either are Amazon affiliates or use Shopify or Magento or any of several other frameworks. All of these frameworks have ways of dealing with sales tax. It just isn’t that arduous any more. It’s an expense but it’s an expense that even mom and pop brick and mortar stores are bearing.
The reasoning behind the exemption was that the then new-fangled online commerce was just getting started. Now it’s 8% of all retail. It doesn’t need a subsidy any more.
I believe it. Definition and tax domicile are going to be much harder than the tracking mechanics. Can you imagine the cat fight between taxing authorities in WA and, say, IL? I hear they need revenue. The inability to determine that killed our deal.
Technically, there is no exemption, it’s a Constitutional interpretation of the territoriality of sovereign power (taxing bodies only have the power to tax activity which has a nexus with the territory).
To change the situation, there would have to be a federal law that would probably look like a federal sales tax. The federal law would have to incorporate the items subject to tax and their respective rates. A lot of this work might already done by the Multistate Tax Commission. But I think for such a tax change to pass, I think the law would have to do something more than tell everyone that the ignorance of all laws is no excuse. (I might be inclined to initially not apply such a law to local government taxes in any event)
The related issue is enforcement. Is the tax to be enforced by the IRS, in which case it would make the most sense for it to adopt regulations, including an annual statement of things mentioned in the previous paragraph. The alternative of state enforcement is made difficult because a defendant cannot be sued in a state in which it does not have minimal contacts (a certain nexus if you will), and that is a due process requirement that I don’t believe the federal government has the power to suspend. The suit could be made amenable in a federal court, but still it would require the state to send its lawyers to another jurisdiction.
I probably support closing the loophole, but I wonder as I think through this how many retailers would be identifiable in which the retailer isn’t already paying an income tax to that state. It could be that a lot of businesses will end up paying without a real threat of enforcement or identification, but it starts to seem like if you want this to be effective, you are almost going to have to embrace the idea of a national sales tax, calculated on the business income tax return with an offset for state income tax payments.
@Guarneri , each state taxes differently, but the Supreme Court has held that a state cannot impose a tax that violates Constitutional due process or the interstate commerce clause (which involve two different tests). It’s a situation where if you are in a gray area, you would be looking at two different layers of law.
Honestly, I don’t see many places where sales tax isn’t charged and in my mind it’s no big deal.
It can be complicated however as states differ in how they treat sales taxes but e-commerce sites seem to take care of that in the background.
There are services that provide the functionality, keep the state and local tax tables up-to-date, etc.
PD
I’m neither a tax lawyer nor tax accountant, although we had first rate advisors. The specific issue at hand was whether the installation, training and periodic servicing of some large pieces of capital equipment by local dealers for the company that manufactured the equipment created nexus. Naturally, the manufacturer took the tax position that it did not, and had not paid in foreign states. Our accountants, Deloitte, pointed out that the tax position might not hold. The magnitude of the potential liability was huge.
Our Deloitte team was comprised of serious people. We were lucky to have had, for 20 years, (for historical reasons) the same M&A tax and audit team that did KKRs work. We walked from the deal. We understand that the target slowly worked their way towards our position in subsequent years.