The Supreme Court's decision to stay out of the legal battle over New York's attempt to collect online sales tax is expected to increase pressure on Congress to move forward with the stalled Marketplace Fairness Act, as well as opening the door to increasing numbers of states passing their own Amazon laws.
"Now that the Supreme Court has decided not to hear the Amazon and Overstock.com cases and to let the New York click-through nexus provisions stand, I can see many more states jumping on the bandwagon to enact similar rules," said Daniel Effron, national leader of the state and local tax practice of Top 100 Firm Marcum LLP.
Under click-through nexus provisions, online retailers who drive consumer traffic to their Web sites through links placed on other sites are considered to have the same presence, or nexus, for sales tax purposes as do traditional brick-and-mortar retailers.
"An interesting follow-on to this is the Marketplace Fairness Act, which is still stuck in Congress," Effron said. "If the act passes, it would essentially make the click-through nexus rules such as exist in New York a moot point, since all companies that sell products via the Internet will have to collect and remit sales taxes, regardless of whether a particular state enacts click-through provisions."
If so, this past December 2 may have been the last Cyber Monday to be relatively tax-free for many shoppers.
PRESSURE ABOVE AND BELOW
The court decision opens the door for many more states to adopt similar Internet sales taxes, according to Andrew Wesemann, a doctoral student in the Institute of Public Policy at the University of Missouri Truman School of Public Affairs, who has conducted extensive research on Internet sales taxes.
Wesemann also says that this development may put pressure on the federal government to move forward with its own Internet tax legislation. "The Marketplace Fairness Act, which has already been passed in the U.S. Senate, would require states that decide to levy Internet sales taxes to either join existing Internet sales tax agreements or create their own system that meets certain federal guidelines," he said. "With the Supreme Court possibly opening the door for more states to adopt their own Internet sales taxes, it may push Congress to pass the Marketplace Fairness Act to help regulate the system."
The reason there's an issue at all is the 1992 decision by the Supreme Court in Quill, which prohibited states from requiring out-of-state retailers to collect sales tax from residents of the state unless they have a nexus in the state. Nexus is the minimum threshold of contact that must exist between a taxpayer and a state that would allow the state to impose tax. The concept is based on two clauses in the Constitution: the Commerce Clause, which prohibits states from unduly burdening interstate commerce, and the Due Process Clause, which requires a minimum connection between a state and an entity it wishes to tax.
Ironically, the help for small businesses that proponents of the act claim may be misplaced, according to opponents. "This bill will negatively impact small businesses that use 'no sales tax' as a way to compete on price against large retailers," said Kenneth Wisnefski, an online marketing expert and the founder and chief executive of Webimax. "It is very challenging for small businesses to survive beyond five years as of now, and this bill could most likely lessen that time span."
According to Top 100 Firm McGladrey's recently released survey of retail executives, many retailers view the Marketplace Fairness Act as a significant threat to their profitability, with nearly all - 98 percent - projecting that the legislation, if passed, would result in price increases for consumers as they seek to offset new compliance costs. Almost half of those executives said that the Marketplace Fairness Act's passage would drive them to consider terminating at least some online sales.
"It's a little ironic that MFA, while in perception designed to be competitive, has a negative impact on the smaller businesses," said Dustin Petersen, a McGladrey partner. "There is a direct correlation of smaller to larger businesses regarding the perceived negative impact this bill will have. The reason is cost -- smaller companies don't have the deep accounting team that has the ability to file monthly in 50 states, while the larger ones do. They might have an entire team that deals with state sales tax. And despite the availability of software, a lot of the tech-based compliance platforms have a pricing structure which decreases with volume, so if you're a smaller retailer your cost per transaction is likely to be a lot higher than for a larger retailer."
The McGladrey Marketplace Fairness Act Survey was conducted using an online questionnaire, promoted by McGladrey and coordinated by an independent research firm, which also compiled the final survey results. In the survey, 45 percent of smaller middle-market retailers, most of which view their ability to sell without sales tax as an advantage in competing with larger companies, view the MFA as a threat to that competition, while over three quarters (77 percent) of the largest middle-market retailers view it as a boon to their competitive positioning.
Smaller middle-market retailers were more likely to predict a negative impact on compliance costs, while larger companies, most of which currently charge sales tax, particularly those in the upper half of the $10 million to $1 billion range, predict a positive impact. Given that most of the larger companies in the survey are already charging sales tax in some or all states, this likely reflects their belief that normalization of the process will benefit them, Petersen indicated.
Retailers in the lower revenue ranges of the middle market were far more likely than their larger peers to view the MFA as a potential threat to profitability. Fifty percent of retailers in the $10 million to $50 million range projected that the MFA would have a negative impact on their companies' profit, while 74 percent of the largest companies -- in the $500 million to $1 billion range - projected that the legislation would positively impact their profit.
The results are surprising, Petersen observed, in that "more than anything else, people believe that MFA would be beneficial to mom-and-pops, while the responses to the survey overwhelmingly show smaller online retailers will see the greatest negative to this. It's further supported by the fact that Amazon is in full support of MFA."
State and municipal budget issues will be a driving factor in the arena in the near term, Petersen indicated. "I don't see Congress doing anything immediately, so we'll see continued effort to address the issue on the part of the states," he said.
