Representing as much as a third of annual budget, one of the most important sources of revenue for State and Local government is sales and use tax. Different in every state (and sometimes in municipalities), they represent an important resource for most State and Local governments. In recent years, however, the tax base in most states has started to erode due to online sales. As of September 2015, ecommerce sales represented 7.4% of total US retail sales. That’s a year over year growth of 16.68% and it only continues to grow.
The current laws require tax on Internet sales in most states, but if the retailer doesn’t have a physical presence in the state, it falls on the consumer to report and pay that tax – something that rarely happens. As a prime example, in a recent article on KSL.com in Utah, it was estimated that proper collection of these taxes would net $80-$300 million in tax revenue. In 2015, only $200,000 was actually collected.
The problem isn’t the current laws, which most states have in place, but the inability of those states to enforce the law. There’s no centralized reporting of sales from ecommerce merchants operating out of state, and in most cases, individual citizens likely don’t know this is required of them.
The Proposed Solution to a Sales Tax Shortfall
As the percentage of purchases made by US consumers online increases and more states look for ways to address this at the legislatorial level, a federal solution has become necessary. In Utah, Sen. Curt Bramble of the State Legislature, also president of the National Conference of State Legislatures, is proposing legislation in his home state that would force collection of sales tax on these online sales.
At a local level, more direct enforcement will certainly help to increase awareness and require both retailers and citizens to be more proactive, but to many people, the only solution is one that more broadly requires enforcement across state lines. Previous court decisions that have limited the ability of states to collect sales tax across state lines, is being addressed through new cooperation by state legislatures. The byzantine system in which retailers only collect sales tax in states where they have physical presence is due to Supreme Court rulings made in 1967 (Bellass Hess) and 1992 (Quill Corp) – both of which significantly predated our current ecommerce environment and the advent of technology that would enable cross-state sales tax collection without significant burden to retailers.
The result of all this is the Marketplace Fairness Act, originally passed in 2013 by the Senate and now in a new 2015 iteration, awaiting approval by the House of Representatives. The act would allow the 24 states that have joined together as part of the National Conference of State Legislature’s efforts to collect sales tax across state lines, regardless of physical location of retailers.
When Will This Go into Effect
The Marketplace Fairness act has been debated for several years already but there is a strong push by 2016 legislatures to make it a focal point at the local level. By passing State legislation, as Utah legislators hope to do to address their local budget shortfalls and continuing to work with the NCSL to lobby for a new Federal law, the hope is that the act can move forward.
It remains to be seen when or if the new law will be passed in its current iteration, but if it is, online retailers will become more responsible for sales tax collection at a national level, rather than just in states where they have a physical presence. For small retailers especially that have only one physical location, this will require a number of changes to business operations, though many states have also indicated a simplification of the sales tax registration and reporting process to encourage adherence to the new laws.