As accountants and tax attorneys, we often find ourselves in conversation with our peers about the constitutionality of state taxation.
Our customers and clients rely on us to have these discussions in an effort to better define and advance tax law. Thanks to Amazon.com and other large e-commerce retailers, along with their more traditional brick-and-mortar counterparts, we may be witnessing a critical shift in the debate over the constitutionality of one state tax in particular: the sales tax.
Through their interpretation of the Commerce Clause of the U.S. Constitution, the Supreme Court has made it clear that no state or local taxing authority can impose a tax on any seller if that tax is deemed to impede interstate commerce. While the decisions handed down in the National Bellas Hess and Quill cases have given accountants and tax attorneys sufficient guidance to answer the most basic nexus questions for their clients and customers, the advent of e-commerce muddied that guidance by removing a clear test to determine if nexus exists. Most e-commerce companies lack the physical presence requirements needed for the jurisdiction to assert nexus and require the retailer to collect and remit their sales tax.
New legislation presented before Congress and the House of Representatives seeks to allow federal intervention into the complex questions that arise surrounding this topic. Commonly referred to as the Main Street Fairness Act of 2011, this legislation would give federal consent to the Streamlined Sales and Use Tax Agreement, also known as the SSUTA.
While this agreement goes a long way in simplifying the collection and remittance requirements imposed on retailers of all size, it still leaves one question unanswered: What exactly impedes interstate commerce and how do we address this most fundamental issue? This question is sparking debate around a critical piece of the SSUTA: the small-seller exception and its application to collection and remittance requirements. This one simple concept raises yet another question: Will allowing small businesses to be exempt from collection and remittance of sales tax where they have no physical presence satisfactorily address the constitutional limitations imposed on taxing?
The advent of sales and use tax software and the intervention of the SSUTA to partially offset that cost with state monies have gone a long way toward minimizing the burden of monitoring sales and use tax rates and rules across the nation. The SSUTA goes even further and places that burden squarely on the states that are parties to the agreement via the certified software companies that partner with the Streamlined Sales Tax Governing Board, to provide these services to taxpayers.
Technically speaking, a remote seller could install, set up, run and update software for little to no cost to the business, depending on their vendor of choice. But what if that remote seller also conducts business in states that are not party to the SSUTA, where they either must, or voluntarily wish to, collect tax?
In November 2010, the SSUTA was modified to include a small-seller exception that exempts retailers with gross receipts of less than $500,000 per year from the remote-seller collection and remittance requirements. (The seller will always remain liable for collection and remittance in their state or states of domicile, regardless of gross receipts.) The idea behind a small-seller exception is simple and effective. Recognizing that small businesses do not have the resources available to them to monitor the ever-changing sales and use tax rates and rules, the SSTGB provided a vehicle to prevent violations of interstate commerce constitutional and case law by allowing smaller businesses to continue to sell across state lines without fear of audit or exposure by the state into which they are selling.
It's this concept that has e-commerce companies like eBay still on the fence about federal legislation to regulate the collection and remittance requirements on remote sellers. The question that is being presented now is one of national equality: Can states that are not members of the SSUTA still pass laws that would impose unfair collection and remittance requirements on remote businesses?
The simple answer is yes. Nowhere in the SSUTA or the Main Street Fairness Act does it require all 50 states and the District of Columbia to become members of the agreement. If states are allowed to remain outside the confines of federal law governing sales and use tax collection and remittance requirements, have Commerce Clause issues been adequately resolved? Again, the answer is simple: no. State and local governments that are not party to the SSUTA may still seek to impose sales tax collection and remittance requirements on remote sellers as they are currently trying to do, regardless of whether that seller has the resources necessary to collect and remit sales tax.
If the business cannot compete in its chosen marketplace due to unfair sales tax law, is that not the exact definition of a violation of the Commerce Clause that we are striving to address?
Small and middle-ma
rket businesses are very much a part of this debate and should remain at the forefront of our minds as we try to make progress on this issue. It is unlikely that anyone would argue that companies with more revenue are in a better position to invest in sales tax collection and remittance across the country. The question that we must help to answer is not how this law would affect larger companies, but instead how would this law affect the small seller down the street that wishes to expand their market by offering their products via a Web store to buyers nationwide?
While the SSUTA and the Main Street Fairness Act of 2011 are a huge step forward in leveling the playing field between e-commerce and brick-and-mortar retailers, they fail to address a critical issue that directly impacts small business. If federal law does not address these issues, the constitutionality of requiring remote sellers to collect and remit sales tax will always be called into question.
It will not be long before many of us will be put into the position of having to answer questions related to this topic from our customers and clients. Recognizing this, we must continue to work with our constituents and the taxing authorities to ensure fair policy is implemented. A little bit of effort up front will go a long way toward addressing the long-term considerations that will arise as sales tax law evolves to meet the demands placed on it by 21st century businesses.
Cory Barwick is lead tax analyst at CCH, a Wolters Kluwer business. He was previously director of compliance at SpeedTax.
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