The question of whether online retailers must collect sales tax is on the agenda again, as state officials seek to push either Congress or the U.S. Supreme Court to act on a national mandate.
The front lines in this battle now are in two states: Colorado and Alabama.
In Colorado, a federal appeals court reversed a lower court ruling against a state law that requires out-of-state retailers to inform consumers of their obligation to pay “use tax”—effectively the same thing as a sales tax—on online, telephone and mail-order purchases and to report purchases by Colorado residents to the state Department of Revenue.
The Alabama Department of Revenue, meanwhile, adopted a rule Jan. 1 requiring out-of-state retailers to collect sales tax. Joe Garrett, Alabama’s deputy revenue commissioner, says they took that step knowing that the rule contradicts a 1992 U.S. Supreme Court ruling that says states can only require companies with a physical presence in the state to collect and remit sales tax. Thus, online retailers without a store, warehouse or office in a state must not collect sales tax from consumers in that state. The consumer is legally obligated to pay the sales tax, but few do.
The Alabama tax-collection agency is hoping a retailer will sue the state and start the process of getting a resolution either in Congress or at the U.S. Supreme Court, Garrett says. He says state officials are frustrated by the lack of action in Congress but encouraged by an opinion U.S. Supreme Court Justice Anthony Kennedy wrote last year in which he said that “dramatic technological and social changes” since the 1992 Supreme Court ruling have made the states’ position stronger. Kennedy wrote that “the legal system should find an appropriate case” for the court to reconsider its 1992 ruling.
While seeking to provoke a legal battle, Alabama also took steps last year to address online retailers’ complaints that a national sales-tax collection requirement would force them to collect sales tax in some 10,000 taxing jurisdictions around the United States, each with its own rates and rules about which items are covered. Alabama said online and catalog retailers based outside the state could pay a single sales tax rate and submit to a single audit, regardless of the location in Alabama of the consumer making the purchase. The first collections were due Feb. 20, and more than 30 remote sellers are adhering to the process, Garrett says. He could give no total amount collected so far.
In Colorado, the appeals court ruling revived a law passed in 2010 but never implemented. The law would require retailers with $100,000 or more in annual sales to Colorado residents to provide those consumers with a report of their past year’s purchases and notify them of their responsibility to pay use tax on those purchases. The law also required the retailers to provide the state with an annual report listing the names, billing addresses, shipping addresses and the total amount of purchases for each of their Colorado customers.
The Colorado law was never implemented because the presiding judge in the case, Robert Blackburn, of the U.S. District Court of Colorado, wrote that it placed unique burdens on out-of-state retailers and was discriminatory. That ruling came in a lawsuit brought by the Direct Marketing Association, a trade group for direct-to-consumer retailers.
But the 10th U.S. Circuit Court of Appeals reversed that ruling this week. The appeals court upheld the law’s constitutionality, saying it doesn’t discriminate or unduly burden interstate commerce. The appeals court sent it back to the Colorado district court for a re-hearing and final ruling. The circuit court ruled the law made no distinction between in-state and out-of-state retailers and provides no advantage to in-state over out-of-state retailers.
Forty-five states and the District of Columbia have sales taxes. Of those, 24 states have instituted some form of simplified collection process for out-of-state online and catalog retailers who voluntarily collect the tax. Those 24 states pay for software to automatically tally the tax for the remote sellers who volunteer to collect it, according to Neal Osten, director of the Washington, D.C., office of the National Conference of State Legislatures, which supports bills that have been submitted to Congress in recent years requiring retailers to collect and remit sales tax on online and catalog orders, regardless of where the retailer is based.
Another 13 states are considering legislation requiring the sales-tax collection, the NCSL says.
Organizations such as the National Retail Federation, whose members are primarily store-based retailers, also back such legislation, arguing that online retailers get an unfair advantage because consumers consider they get a discount when they buy online and don’t have to pay the sale tax they would pay in a local store.
Such online sales tax legislation passed the U.S. Senate in 2013, but has been blocked primarily by conservative House Republicans who oppose it as a new tax. Yet Senate Republican leaders vow to bring up some form of the legislation for a vote this year, according to an eBay blog post.
University of Tennessee economist Don Bruce estimated in 2009 that states were losing $23 billion a year in revenue by being unable to collect the sales tax on all goods, even if bought online or via catalog. Since that calculation was made, Amazon has started collecting sales tax in 28 states that cover 84% of the U.S. population, thus reducing the amount states would gain if web-only and catalog retailers had to collect sales tax. Bruce says he hasn’t updated his forecast, but he believes the obvious solution is a national approach.
”You’ve got transactions that are identical—two shoppers are buying the same item—but they’re being taxed differently based on how the transaction is being completed,” Bruce says “That’s an issue of fairness because that is a tax disadvantage to local retailers trying to run their businesses.”
Amazon declined to comment. But as the retailer has begun collecting sales taxes in more states, it also has offered to take care of the tax collection and remittance process for other merchants that sell on Amazon.com. Amazon’s’s website shows Amazon charges its Marketplace merchants 2.9% of all sales and use taxes and other transaction-based charges that Amazon collects to handle a merchant’s tax obligations.
Executives of two other companies that sell online say they will deal with new sales tax laws if they are enacted.
Joseph McGarry, president, CEO and founder of online retailer Gloves-Online Inc., says keeping track of individual sales by customers and states is cumbersome for smaller retailers. Yet he’s not opposed to a national uniform retail sales tax code.
“If we could easily track these transactions, then I would not be opposed to a quarterly uniform sales tax payment to individual states, providing that each state had the same sales tax rate and reporting provision,” McGarry says.
Rick Gemereth, chief information officer for model train manufacturer Lionel LLC, says his company already uses software from vendor Avalara to automatically figure out the tax rates for the six states where Lionel has or recently had a physical presence. The software calculates the correct tax and adds it to each customer’s shopping cart before he completes his purchase, Gemereth says. E-commerce accounts for 11% of the retailer’s annual sales, which total between $50 million and $100 million, Gemereth says. The company, which makes and sells toy and collectible trains and die-cast replicas of NASCAR race cars, operates websites LionelStore.com and LionelRacing.com.
The Avalara software is a plug-in that came bundled with Lionel’s NetSuite e-commerce platform when the retailer implemented the platform in 2010, he says. He says Avalara charges a fee based on the number of Lionel’s taxable transactions.
“It’s not cheap, but it’s less expensive than hiring a tax manager,” Gemereth says. “We certainly understand the desire on the state level to collect more taxes. I deal with it by having a trusted service that lets us not have to worry about the accuracy of the tax rates. That lets us focus on how we want to run the company.”