While the effort to pass federal legislation governing sales and use taxes on online purchases appears to have stalled, some states have begun their own initiatives to require online merchants to collect and remit taxes from e-commerce customers across state lines.
The Senate passed the Marketplace Fairness Act in May 2013, but so far the House has not acted on the legislation. Meanwhile, some states such as New York, California, Texas and Pennsylvania have moved forward with alternative measures by passing laws that can create nexus by “click-through” or “affiliated” activities. But some online retailers are worried that the additional sales tax could affect their online traffic and their bottom line.
The Supreme Court may eventually be forced to revisit its 1992 ruling in the case of Quill v. North Dakota, which essentially set the standard for nexus as a merchant having an actual physical presence in a state. But that rule of thumb has become increasingly anachronistic as remote Internet commerce continues to drive many bricks-and-mortar retailers out of business. But disagreement continues over what should succeed the 1992 standard.
“I’ve always liked traditional nexus,” said Steve Oldroyd, senior director in the tax services practice at BDO USA. “It’s the rule of the land, something we’ve lived with for the last 30 years. New York and some of the other states are getting very creative with what traditional nexus is.”
Contrary to popular belief, Internet sales tax transactions are not exempt in any U.S. state, he noted. However, a seller who does not have nexus in a particular state is not liable for the collection and remittance of sales tax on goods and services sold. The Marketplace Fairness Act could change that by requiring remote sellers without traditional nexus to be required to collect and remit sales or use tax. The bill would require online retailers with annual gross receipts of $1 million or more in the U.S. to register and collect sales and use tax in states where they were previously not required.
It is unclear how much tax revenue states are missing from unreported online sales. A 2009 study by professors at the University of Tennessee projected that annual national state and local sales tax losses on e-commerce would grow to $11.4 billion by 2012. However, the National Conference of State Legislatures estimated in 2012 that states lost $23.3 billion in 2012 from being prohibited from collecting sales tax from online and catalog purchases.
Oldroyd has his doubts about any of the estimates. “I’m not sure how much money is out there in the state coffers that is being missed,” he said. “Every time I hear a state or somebody throw out a number, then the reality is it’s like 20 percent of that number. It doesn’t bring in as much money as they say. Sometimes it doesn’t bring in as much as it costs to enact the thing.”
However, he acknowledges that federal legislation would effectively level the playing field for brick-and-mortar and online sellers. In the meantime, he advises accountants to let their business clients know that federal legislation is being considered, although even if it does get enacted, there would probably be at least a year for businesses to adjust to any new tax regime.
“We just warn them that this is out there and this may pass,” he said. “Everybody’s going to get a year to lick their wounds and get it up and running. We always recommend monitoring traditional nexus. We’re warning our clients and anybody that we talk to that they need to keep one eye on this bill to see where they are, if they’re not filing in every state, and we’re talking about this internationally too. I’m not a constitutional attorney, but I do think it’s going to have a far and broad-reaching aspect, maybe far beyond our borders.”