No More Free Ride

The recession is pummeling many states’ budgets, causing more of them to push for collecting taxes on Internet sales.

Sure, government at all levels has grumbled and complained about this for years, but one of the great things about shopping on the Internet, other than the fact you can do it in nothing but your Hello Kitty pink boxers and no one’s the wiser, is the fact that most of the time you don’t have to pay sales taxes. Most of the time, of course, means that unless you have an actual brick-and-mortar establishment in the state where the purchase was made, the customer pays no sales tax. So, if you have a store in Illinois, and your customer is also in Illinois, they pay sales taxes. If they are in Wisconsin, they don’t.

The main reason for this happy state of affairs is a 1992 Supreme Court ruling, Quill vs. North Dakota. In its ruling, the Court held that a connection between the taxing state and the company must exist and that North Dakota’s law saying that any company that advertised three times in the state became obligated to collect sales taxes for the state was a burden on interstate commerce. In other words, the company had to have a physical presence in the state. The Court also saw that the physical presence rule “firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes” and expressed its concern regarding the disruption of settled expectaions, noting that “A bright-line rule in the area of sales and use taxes also encourages settled expectations and, in doing so, fosters investment by businesses and individuals.” All of this is based on the Commerce Clause of the U.S. Constitution and the Court acknowledged that Congress has the power to impose taxes on interstate commerce, which brings us to where we are today.

Streamlined Sales Taxes and The Sales Tax Fairness and Simplification Act

With the economy in recession and tax revenue drying up, that governmental grumbling has grown into a war cry as a number of states, citing losses of billions of dollars in uncollected sales taxes and claiming that the current system puts offline retailers at a disadvantage against their online counterparts, are now acting in creative ways that don’t fall under the Quill decision to collect taxes on online purchases. New York, for example, was the first state to enact laws that would force websites like Amazon and Overstock to collect New York sales taxes on products purchased from New York-based affiliates and other states are following New York’s example, but that does nothing to make the task of collecting these taxes easier. Moreover, there are some online retailers, such as Overstock—they terminated their agreements with more than 3,400 websites that promoted their site and services in New York—who no longer do business in the Empire State as a direct response to the state’s tax laws.

The answer that some have come up with to both simplify the collection of taxes and get around the Quill decision once and for all is a national online sales tax law.

The current bill, called The Sales Tax Fairness and Simplification Act, which is still being drafted by Senator Mike Enzi (R-WY) and Representative Bill Delahunt (D-MA), with help from the National Council of State Legislatures, would overturn the Quill decision and require all but the smallest online retailers to collect sales taxes in those states that are currently taking part in the Streamlined Sales Tax Project. The SSTP unifies states that have agreed to simplify their sales tax laws. It simplifies the administration of local sales taxes, exemptions and rate structures. It also creates uniform definitions, sourcing and provisions for bad debts and it offers businesses three different, technology-based ways to operate within the system:

Certified Service Provider (CSP): The CSP is appropriate for businesses that may be required to collect tax in the future or that wish to move their sales tax functions to another party as it provides full-service tax collection for the states with functions that include tax application software integrated with the business’ products and order processing system, tax return filing, and tax payments. The states pay for this service and the only burden on the business is that they have to provide information on new products, business practices and processing systems in order to facilitate the systems integration. Businesses are not liable for tax errors on transactions processed through the system.

Certified Automated System (CAS): This is a tax application system, certified by the states, that a business obtains and uses as its tax application. The business is responsible for filing returns and paying all taxes collected, but it is relieved of liability for tax application errors on transactions processed through the system.

Certified Proprietary System (CPS): Here, the business maintains its existing tax application system, which is reviewed by the state and certain parts of the system are then certified, which permits the use of state databases for rates and jurisdictions. The business is not liable for mistakes in those parts of the system that are state-certified.

There are currently 23 states in the SSTP now, but that number is expected to rise dramatically, especially if this legislation passes. Other provisions of the law would require states to compensate online retailers for the cost of collecting taxes, and to agree not to prosecute them for tax errors. That, at least, would remove much of the potential liability associated with collecting these taxes.

Will the bill pass? That is hard to say, but those close to the issue acknowledge that it has a far better chance now with both the House and the Senate, as well as the White House, under the control of the Democrats. Add in the pressure from cash-strapped states, counties and municipalities and the odds go even higher. Still, whether the bill passes or not, if you do business online you need to be ready. Your tax accountant or attorney should be able to give you the guidance you need. For more information or to register your business, visit —Charles Cooper

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