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Copyright 2013
The case became a referendum on taxing requirements for remote sellers. North Dakota courts ruled in support of compelling Quill Corp to pay, and then another state court overruled. The lawsuit made its way to the State Supreme Court of North Dakota, which concluded that the Quill Corporation had no nexus and no related sales tax obligation. But the case didnt stop there.
It is this complexity, combined with rapid change at the local, state, and federal levels that poses problems for remote sellers, particularly ecommerce. Definitions of nexus between states are often so incongruous that many ecommerce retailers understandably throw up their hands and assume that they dont have to collect and remit sales tax in municipalities in which they dont have physical presence. By doing so they unknowingly increase their risk of audits and associated penalties.
This map shows taxing jurisdictions within the State of Colorado. Considering that each jurisdiction could have different taxability rules as well as tax rates, the complexity is somewhat daunting. Unfortunately this is just the tip of the iceberg.
Further Down the Rabbit Hole: the City of Denver
This map shows the greater Denver metropolitan area with even more taxing jurisdictions and attendant rates and rules. This makes it essentially impossible to consistently determine an accurate sales tax rate and to manage the frequent changes to both jurisdictions and taxability requirements without some form of powerful automation. Determining accurate taxability encompasses layer upon layer of complexity. If online retailers could use Quill to quickly calculate where they have nexus (a significant physical presence within the state) and those states where they dont, determining nexus would straightforward.
Alas, this is not the case. Determining nexus for ecommerce and remote sellers only tells a small part of the story. The calculations and analysis needed to measure true taxability at the product and service level require more time and expertise than most companies possess. In other words, using Quill to assume exemption is a very common mistake, especially given the changes that are coming at the federal level. These changes stem from the original ruling, in which the High Court calls upon Congress to revisit the issue of physical nexus and potentially overturn Quill. So while states are not allowed to impose nexus legislation in conflict with federal regulations, they are allowed to define nexus in ways they deem appropriate (as long as they dont contravene Quill). In other words, remote sellers are required to follow a myriad of rules far more complex than mere physical presence determinations. With over 11,000 taxing jurisdictions in the United States, each with its own rules and ability to conduct audits, compliance with each is not a trivial task.
Lost sales tax revenue attributed to online retail has been the lightning rod for heated opinion-making on both sides of the issue.
Total state budget shortfall in each fiscall year, in billions of dollars Last recession 0 2002 2003 2004 2005 2009 2010 2011 2012 2013
-$45
In 2011, states collected over $234 billion dollars in sales tax revenue (31% of total tax revenue collected). Other than income tax, state and local jurisdictions rely most heavily on sales tax to support schools, infrastructure, public-safety or the like. The loss of sales tax revenue associated with online retail has become increasingly important in the face of declining state revenues, and in light of the fiscal crisis of the past few years. Following the market crash of 2008, many states faced a looming fiscal crisis, the likes of which had not been seen in a generation. Between 2008 and 2009, states faced dramatic reductions in overall revenue as well as dramatic budget shortfalls (shown to the left). At a time when states are recovering from the great recession there is a heightened awareness of uncollected revenue (especially in the amounts associated with online retail exempted by Quill). Efforts to estimate revenue losses associated with the remote seller exemption are varied. However, a prominent University of Tennessee study is the most commonly cited data source. According to the study lost revenue associated with ecommerce will be $11.4 billion in 2012. When catalog, phone, and all other interstate transactions are included, the Streamlined Sales Tax Governing Board estimates that number is closer to $23 billion annually.
Dramatic Budget Shortfalls & States Looking for Uncollected Revenue such as Sales Tax
Each of these bills also proposes a small seller sales tax exemption, allowed even when businesses have physical nexus. For a summary of the exemption for each bill see sidebar. For nearly a decade, Amazon.com and other ecommerce leaders fought remote seller sales tax obligations by invoking Quill. Amazons legal battles against paying sales tax in states where they did not have nexus are legendary. Amazons fight against collecting sales tax in California was so costly (over $5 million), some claimed the company effectively high-jacked the legislative process. In 2011 however, Amazon appeared to shift its approach. When news outlets began reporting that Amazon was in the process of negotiating a sales tax agreement within the same state, many were shocked. Others marked it as the beginning of a wholesale shift in requirements around sales tax and online retail. In Governing magazine, Paul Misener, Amazons vice president of global public policy, stated that Federal legislation is the only way to level the playing field for all sellers. [T]he only way for states to obtain more than a fraction of the sales tax revenue that is already owed, and the only way to fully protect states rights. Since 2010, some states began requiring Amazon and other remote sellers to collect sales tax. These states include New York, Pennsylvania, and the one making the headlines, California. Changes in sales tax rules have prompted observations that the days of Quill exemptions are numbered, especially when coupled with developments at the federal level. Why would an online retailer, previously adamantly against collecting sales tax, now be one of the most avid supporters of federal legislation in favor of it? More importantly, what does it herald for other online retailers? Many argue that once courts began ruling in favor of states claiming Amazon owed sales tax, the tides turned irrevocably. In late 2011, early 2012, Amazon leadership moved to accept the inevitable and agreed to begin collecting sales tax. For each of the deals struck with states, there were ripple effects that were felt across the world of ecommerce. While no one can predict what will happen with sales tax, it is clear that more local and state jurisdictions are considering requiring more remote sellers to collect sales tax in 2013. Whatever happens, the only certainty is that changes will continue, and the attention on the issue of uncollected revenue will grow. These factors tend to bolster the efforts of the organizations supporting federal changes to Quill. Of the host of bills proposed during 2012, the Marketplace Fairness Act has bipartisan support in the Senate, and has been endorsed by organizations ranging from Amazon and Wal-Mart to the National Governors Association to the United Auto Workers.
Whether its dealing with online sales tax collection, sales tax collection at a physical location, or both, AvaTax takes the stress and guesswork out of sales tax. Avalaras AvaTax system is maintained by its staff of sales tax and technology professionals who track rates, rules and changes across thousands of taxing regions. Imagine the time and resource savings. Imagine automating the collection and remittance process in the many jurisdictions in which your ecommerce business is legally required to be compliant. Avalara simplifies tax collection for ecommerce. Its web-based AvaTax service links directly to a merchants online shopping cart (via an application programming interface, or API) and calculates, in real time, whether the merchant should be collecting sales taxes from an online consumer during the checkout process. Here is an ecommerce scenario that demonstrates how AvaTax addresses these kinds of complexities: An ecommerce merchant is located in New York and sells products to a customer in California. The sales tax possibilities of this single transaction are complex. First, AvaTax validates the address in order to accurately determine the sales tax rules for New York and for the California jurisdiction in which the sales occurs (assuming the vendor has set AvaTax to identify potential nexus in these states). Then, AvaTax identifies the specific products purchased by the consumer to determine if sales taxes apply to those products in that jurisdiction (many products, such as food, are frequently exempt from sales taxes). AvaTax then performs other tests during the transaction, such as determining the number and type of products sold within a specific jurisdiction, and any obligation to collect sales tax that might be required. AvaTax does all of this instantly, while the customer is checking out. If the Californiabased customer owes sales tax, AvaTax also: Applies and collects that amount to the total amount due during the online checkout process. If the vendor has chosen AvaTax Returns, the system also handles filing the sales tax returns with the applicable California jurisdictions, and remitting payment.
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