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Sales Tax Legislation Beyond Ecommerce

Sales Tax Legislation Beyond Ecommerce

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Published by avalara
Sales tax rules are changing. And not just for online retailers. This brief explains what your company can do to prepare.
Sales tax rules are changing. And not just for online retailers. This brief explains what your company can do to prepare.

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Published by: avalara on Feb 28, 2013
Copyright:Traditional Copyright: All rights reserved


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Sales taxlegislation beyond
What every business needs to know
Copyright © 2013
Page 1 o 9
Sales Tax Legislation Beyond Ecommerce
The world before ecommerce
Montgomery Ward
issued its frst catalog in 1872, sales tax wasn’t yet a twinklein the eye o lawmakers. The frst local sales taxes were adopted in the 1930s inresponse to reductions in government revenue. It only took a ew decades or thecomplexities o sales tax to garner congressional attention. In 1965, a congressionalreport noted that the existing system o state taxation aecting interstate commerce“…works badly or both businesses and the States.” From the beginning, the aims o state government and remote sellers ran counter to one another.On the one hand, states sought to maximize revenue by compelling these vendors tocollect sales tax. On the other, remote sellers oten resisted these requirements, invok-ing ederal rules protecting interstate commerce. The issue centered on defnitions o nexus (physical presence within a taxing jurisdiction that triggers sales tax collectionobligations) set orth in prior rulings. In the 1990s this conlict culminated in the Stateo North Dakota fling a lawsuit claiming that the Delaware-based retailer Quill Corpo-ration owed sales tax.The case became a reerendum on taxing requirements or remote sellers. NorthDakota courts ruled in support o compelling Quill Corp to pay, and then another statecourt overruled. The lawsuit made its way to the State Supreme Court o North Dakota,which concluded that the Quill Corporation had no nexus and no related sales taxobligation.But the case didn’t stop there.
When the Supreme Court Ruled on Remote Sellers
In 1992 ater more wrangling at the state level, the case rose to the U. S. SupremeCourt
(The Quill Corp v. Heitkamp
, 504 U.S. 298 (1992) (hereater Quill), resulting in aruling that would guide the collection and remittance o sales tax by remote sellersor decades.
Early Catalogs Pre-Dated Sales Tax
I you’ve read the news this year, you’re aware that Amazon has begun collecting salestax in Caliornia and other states or the very frst time. Maybe you’ve told yoursel thatyou don’t need to worry too much because your company engages in little or no ecom-merce activity.Well, i that’s the case, think again. Why? Because there have been developments atthe ederal level which signiy a possible sea change in how many retailers will be re-quired to collect sales tax. Ecommerce companies like Amazon are simply in the newsbecause they are at the ront o the fght. Understanding how we got here —and moreimportantly, where we’re headed —is critical inormation or all businesses.
Page 2 o 9
Sales Tax Legislation Beyond Ecommerce
Though the U.S. Supreme Court determined that the nature o Quill Corp’s activitieswithin North Dakota meant that the imposition o sales tax on the company was air,requiring collection and remittance o the tax created an “undue burden” on interstatecommerce. The Court fndings highlight the complex burden o ensuring constitu-tionality rom the perspective o the Commerce Clause o the U.S. Constitution (notinterering with interstate commerce), and the Due Process Clause (ensuring the un-damental airness o government), particularly when they run counter to one another.For example, “...while a state may, consistent with the Due Process Clause, have theauthority to tax a particular taxpayer, imposition o the tax may nonetheless violatethe Commerce Clause.” In other words, companies engaged in interstate commercecan be required to charge sales tax, as long as it does not substantially interere withthat commerce.It is this complexity, combined with rapid change at the local, state, and ederal levelsthat poses problems or remote sellers, particularly ecommerce.Defnitions o nexus between states are oten so incongruous that many businessesunderstandably throw up their hands and assume that they don’t have to collect andremit sales tax in municipalities in which they don’t have physical presence. By doingso they unknowingly increase their risk o auditsand associated penalties.
What you don’t know can hurt you: nexus
To address these complexities, the U.S. Supreme Court clarifed that only those com-panies with “signifcant physical presence,” or “nexus” in a state would be requiredto collect sales tax there. This so-called “bright line” defnition established physicalnexus as the prevailing standard by which sales tax requirements or remote sellerswere measured. In eect, this resulted in an assumed tax exemption or remote sellerswithout this physical presence.This assumption is aulty and here’s why:State taxing authorities are orever defning and redefning the activities that causenexus that are not explicitly mentioned in Quill. See Nexus Quiz sidebar.To compound the conusion, so-called “Home Rule” states such as Colorado, Idaho, andLouisiana, can delegate taxing authority (including rulemaking regarding nexus) tolocal jurisdictions.
NEXUS QUIZ:Does Your CompanyPotentially Owe Sales Tax?
Your ecommerce business might havenexus in a particular state i you answeryes to one or more o the questionsbelow:1. Do you have traveling salespeople that physically enter thestate to conduct business?2. Do you utilize contract labor inthe state to aid in your businesseort?3. Do you have marketing personneland/or other company representa-tives in the state, who conductbusiness on your behal?4. Do you own or lease any real orpersonal property located in thestate?5. Do you participate in any tradeshows or exhibits that promoteyour products or services in thestate?

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