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and sales tax legislation
Understanding ecommerce & sales tax
Copyright © 2013
Supreme Court determined that the nature of Quill Corp’s activities within North Dakota meant that the imposition of sales tax on the company was fair. Heitkamp.S. 298 (1992) (hereafter Quill).. which concluded that the Quill Corporation had no nexus and no related sales tax obligation. In 1965. resulting in a ruling that would guide the collection and remittance of sales tax by remote sellers for decades. particularly when they run counter to one another. the case rose to the U. sales tax wasn’t yet a twinkle in the eye of lawmakers. The first local sales taxes were adopted in the 1930s in response to reductions in government revenue. and the Due Process Clause (ensuring the fundamental fairness of government). consistent with the Due Process Clause. The lawsuit made its way to the State Supreme Court of North Dakota. It only took a few decades for the complexities of sales tax to garner congressional attention. On the other. Early Catalogs Pre-Dated Sales Tax The case became a referendum on taxing requirements for remote sellers. For example. requiring collection and remittance of the tax created an “undue burden” on interstate commerce. The Court findings highlight the complex burden of ensuring constitutionality from the perspective of the Commerce Clause of the U. When the Supreme Court Ruled on Remote Sellers In 1992 after more wrangling at the state level. Though the U. On the one hand. North Dakota courts ruled in support of compelling Quill Corp to pay. as long as it does not substantially interfere with that commerce.” From the beginning. a congressional report noted that the existing system of state taxation affecting interstate commerce “…works badly for both businesses and the States. and then another state court overruled. remote sellers often resisted these requirements. In the 1990s this conflict culminated in the State of North Dakota filing a lawsuit claiming that the Delaware-based retailer Quill Corporation owed sales tax.S. have the authority to tax a particular taxpayer. the aims of state government and remote sellers ran counter to one another. But the case didn’t stop there. states sought to maximize revenue by compelling these vendors to collect sales tax.” In other words. The issue centered on definitions of nexus (physical presence within a taxing jurisdiction that triggers sales tax collection obligations) set forth in prior rulings. . invoking federal rules protecting interstate commerce.Page 1 of 9 Ecommerce and Sales Tax Legislation The world before ecommerce When Montgomery Ward issued its first catalog in 1872. “. Supreme Court (The Quill Corp v. companies engaged in interstate commerce can be required to charge sales tax.S..while a state may. imposition of the tax may nonetheless violate the Commerce Clause. Constitution (not interfering with interstate commerce). S. 504 U.
See Nexus Quiz sidebar. Supreme Court clarified that only those companies with “significant physical presence. state. so-called “Home Rule” states such as Colorado. This assumption is faulty and here’s why: State taxing authorities are forever defining and redefining the activities that cause nexus that are not explicitly mentioned in Quill.S. who conduct business on your behalf? 4.” or “nexus” in a state would be required to collect sales tax there. Do you own or lease any real or personal property located in the state? 5. can delegate taxing authority (including rulemaking regarding nexus) to local jurisdictions. Do you have marketing personnel and/or other company representatives in the state. combined with rapid change at the local. In effect. and Louisiana. particularly ecommerce. Do you utilize contract labor in the state to aid in your business effort? 3. Do you participate in any trade shows or exhibits that promote your products or services in the state? It is this complexity. This so-called “bright line” definition established physical nexus as the prevailing standard by which sales tax requirements for remote sellers were measured. To compound the confusion. this resulted in an assumed tax exemption for remote sellers without this physical presence. . By doing so they unknowingly increase their risk of audits and associated penalties. Definitions of nexus between states are often so incongruous that many ecommerce retailers understandably throw up their hands and assume that they don’t have to collect and remit sales tax in municipalities in which they don’t have physical presence. and federal levels that poses problems for remote sellers. Idaho.Page 2 of 9 Ecommerce and Sales Tax Legislation NEXUS QUIZ: Does Your Company Potentially Owe Sales Tax? Your ecommerce business might have nexus in a particular state if you answer yes to one or more of the questions below: 1. Do you have traveling sales people that physically enter the state to conduct business? 2. the U. What You Don’t Know Can Hurt You: Nexus To address these complexities.
the complexity is somewhat daunting. Determining accurate taxability encompasses layer upon layer of complexity. . 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. determining nexus would straightforward. 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 don’t. Unfortunately this is just the tip of the iceberg. 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. Considering that each jurisdiction could have different taxability rules as well as tax rates.Page 3 of 9 Ecommerce and Sales Tax Legislation The State of Colorado: Each Color Represents a Different Taxing Jurisdiction This map shows taxing jurisdictions within the State of Colorado.
creating more affordable options (and a freer market) for the consumer.” . Lost sales tax revenue attributed to online retail has been the lightning rod for heated opinion-making on both sides of the issue. Free from being required to collect sales tax. With over 11. the perception of unfairness persists. Determining nexus for ecommerce and remote sellers only tells a small part of the story. In turn. especially given the changes that are coming at the federal level.000 taxing jurisdictions in the United States. So while states are not allowed to impose nexus legislation in conflict with federal regulations.” Ecommerce & Debates about Fairness Quill clarified the tax obligations of remote sellers and defined physical nexus in order to reduce the burden of collecting and remitting tax on remote sellers. The calculations and analysis needed to measure true taxability at the product and service level require more time and expertise than most companies possess. ecommerce analysts and online retail trade groups argue that ecommerce stimulates the economy by uncovering previously untapped markets. “Lost sales tax revenue attributed to online retail has been the lightning rod for heated opinion-making on both sides of the issue. these entities could charge lower prices than their brickand-mortar competitors. Defenders also note that shoppers go online not to save on sales tax. common arguments levied against online retailers include claims that their tax advantage allows them to: • drive mom-and-pop operations out of business • transfer tax burden to brick-and-mortar stores • deprive state and local jurisdictions of much needed sales tax revenue On the flip side. issues of fairness and perceived inequity penetrate tax policy discussions at every level. Whatever the cause. “each with its own rules and ability to conduct audits. this defined tax liability without hindering interstate commerce. These changes stem from the original ruling. Nevertheless.Page 4 of 9 Ecommerce and Sales Tax Legislation Alas. in which the High Court calls upon Congress to revisit the issue of physical nexus and potentially overturn Quill. using Quill to assume exemption is a very common mistake. but for greater convenience and a larger selection. compliance with each is not a trivial task. Fueled by this perceived inequity. This inequity ignited debates regarding marketplace unfairness. In other words. this is not the case. they are allowed to define nexus in ways they deem appropriate (as long as they don’t contravene Quill). In other words. remote sellers are required to follow a myriad of rules far more complex than mere physical presence determinations. Justice White’s dissenting opinion argued that bright-line nexus benefited remote sellers.
infrastructure. many states faced a looming fiscal crisis. states must comply with the Streamlined Sales Tax User Agreement (SST). States in compliance with the SST follow strict guidelines including the utilization of technology to modernize and actualize efficiency in sales tax administration. public-safety or the like. State level administration of sales and use tax collections 2.4 billion in 2012. and in light of the fiscal crisis of the past few years. Simplification of state and local tax rates 6. With respect to nexus and remote seller sales tax rules SST specifies that. revised June 2012 In 2011. Simplification of tax remittance process 10. Efforts to estimate revenue losses associated with the remote seller exemption are varied. Simplified administration of exemptions 8. To qualify for membership. Dramatic Budget Shortfalls & States Looking for Uncollected Revenue such as Sales Tax Streamlines Sales Tax (SST) The 24 states participating in the national streamlined sales tax effort meet the following unified taxability standards: 1. Uniformity in the state and local tax bases 3.” States that voluntarily participate can petition for full membership by meeting specific requirements to simplify tax administration. “…each SST member state is authorized to require all sellers not qualifying for a small seller exception to collect and remit sales and use taxes…” This authorization is consistent with language in proposed current federal legislation. in billions of dollars Last recession 0 2002 2003 2004 2005 2009 2010 2011 2012 2013 -50 -$40 -100 -150 -200 *Reported to date -$75 -$80 -$45 -$55* -$110 -$130 -$107 -$191 Source: CBPP survey. phone. states collected over $234 billion dollars in sales tax revenue (31% of total tax revenue collected). Twenty-four states to date are full members. 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). When catalog. Both the Main Street Fairness Act and the Marketplace Fairness Act allow states to require remote sellers without physical presence to collect sales tax if they join the Streamlined Sales and Use Tax Agreement (SST). The National Governor’s Association and the National Conference of State Legislatures formed the Streamlined Sales Tax Governing Board to “…simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance. However. Federal Legislation and the Surprising Support of Former Adversaries Each of the three pieces of federal legislation before Congress require states to meet certain requirements in order to require remote sellers without physical presence to collect sales tax. Simplified tax returns 9.Page 5 of 9 Ecommerce and Sales Tax Legislation Total state budget shortfall in each fiscall year. The loss of sales tax revenue associated with online retail has become increasingly important in the face of declining state revenues. and a number of others are on their way to full membership. state and local jurisdictions rely most heavily on sales tax to support schools. . According to the study lost revenue associated with ecommerce will be $11. Uniform sourcing rules for all taxable transactions 7. Other than income tax. a prominent University of Tennessee study is the most commonly cited data source. Following the market crash of 2008. and all other interstate transactions are included. the Streamlined Sales Tax Governing Board estimates that number is closer to $23 billion annually. Protection of consumer privacy What States Are Doing In 1991. Uniformity of major tax base definitions 4. Between 2008 and 2009. the likes of which had not been seen in a generation. states faced dramatic reductions in overall revenue as well as dramatic budget shortfalls (shown to the left). Central electronic registration system 5.
Amazon’s legal battles against paying sales tax in states where they did not have nexus are legendary. [source: : Avalara Blog] . and the only way to fully protect states’ rights. For a summary of the exemption for each bill see sidebar. and the one making the headlines. stated that “Federal legislation is the only way to level the playing field for all sellers. Of the host of bills proposed during 2012.” Since 2010. Others marked it as the beginning of a wholesale shift in requirements around sales tax and online retail. For each of the deals struck with states. When news outlets began reporting that Amazon was in the process of negotiating a sales tax agreement within the same state. some claimed the company effectively high-jacked the legislative process. Whatever happens. now be one of the most avid supporters of federal legislation in favor of it? More importantly. allowed even when businesses have physical nexus. In late 2011. Marketplace Equity Act Businesses with gross annual receipts of less than $1 million nationally or $100. Pennsylvania. [T]he only way for states to obtain more than a fraction of the sales tax revenue that is already owed. and has been endorsed by organizations ranging from Amazon and Wal-Mart to the National Governors Association to the United Auto Workers. what does it herald for other online retailers? Many argue that once courts began ruling in favor of states claiming Amazon owed sales tax. it is clear that more local and state jurisdictions are considering requiring more remote sellers to collect sales tax in 2013. These factors tend to bolster the efforts of the organizations supporting federal changes to Quill. California. there were ripple effects that were felt across the world of ecommerce. Marketplace Fairness Act Businesses with gross annual receipts of less than $500.000 in the state are exempt.000.com and other ecommerce leaders fought remote seller sales tax obligations by invoking Quill. Each of these bills also proposes a “small seller” sales tax exemption. Amazon. Amazon’s fight against collecting sales tax in California was so costly (over $5 million). For nearly a decade. especially when coupled with developments at the federal level. previously adamantly against collecting sales tax. some states began requiring Amazon and other remote sellers to collect sales tax. Amazon’s vice president of global public policy. which currently exempts businesses with gross annual revenue of less than $500. the only certainty is that changes will continue. In Governing magazine. and the attention on the issue of uncollected revenue will grow. Changes in sales tax rules have prompted observations that the days of Quill exemptions are numbered. While no one can predict what will happen with sales tax. the Marketplace Fairness Act has bipartisan support in the Senate.Page 6 of 9 Ecommerce and Sales Tax Legislation Small seller exemption in each bill: Main Street Fairness Act Small seller exemption determined by the Streamlined Sales and Use Tax Agreement. early 2012. In 2011 however. These states include New York. the tides turned irrevocably. many were shocked. Paul Misener. Why would an online retailer. Amazon appeared to shift its approach.000 are exempt. Amazon leadership moved to accept the inevitable and agreed to begin collecting sales tax.
the entrepreneurial energy and technical savvy used to start and maintain a successful ecommerce business often don’t carry through to internal daily operations. Rather than using technology to fulfill sales tax obligations. is it any wonder that online merchants are more confused than ever about whether to collect sales tax? Or that many businesses prefer to delay or ignore addressing the sales tax morass until later? No one likes managing sales tax. ecommerce businesses often rely on outdated manual approaches. efficient way to meet the increasingly complex challenges associated with multijurisdictional and remote seller sales tax compliance. a dynamic online solution that provides highly accurate and instantaneous results is the only viable answer. Automate Sales Tax. Why wait to automate? Given the heated debate surrounding ecommerce and sales tax. ecommerce merchants often hold erroneous opinions such as: 1. all with different rates and rules. Ecommerce entrepreneurs frequently grapple with the choice between efficiency and expediency. sales tax is an incredibly complex issue. The best solution for companies of all sizes is to utilize external resources with specialized expertise and technology. especially ecommerce merchants required to collect in multiple states. In the ecommerce arena.Page 7 of 9 Ecommerce and Sales Tax Legislation How Can Ecommerce Businesses Address These Challenges? Even if the debates about Quill and marketplace equity are sorted out. Just as companies outsource and automate payroll management and other requirements that are extraneous to their core business. the difficulty of determining multi-jurisdictional sales tax obligations still seems to require a crystal ball and an army of accountants. and the ability to utilize manual systems is not feasible. I don’t have to worry about sales tax 2. There are multiple providers of outsourced sales tax services. This company has been doing it this way for years so there is no need to change Ironically. Business owners often assume they can take care of sales tax themselves. When it comes to dealing with sales tax. Outside the state where I’m located. I only need to know and collect one tax rate in additional states where I have operations 3. automating sales tax is an affordable. . Save Yourself Time and Money As this research brief establishes. all while juggling the realities of an increasingly complex business environment.
and any obligation to collect sales tax that might be required. • Then. the system also handles filing the sales tax returns with the applicable California jurisdictions. Imagine automating the collection and remittance process in the many jurisdictions in which your ecommerce business is legally required to be compliant. such as determining the number and type of products sold within a specific jurisdiction. are frequently exempt from sales taxes).Page 8 of 9 Ecommerce and Sales Tax Legislation Whether it’s dealing with online sales tax collection. AvaTax also: • Applies and collects that amount to the total amount due during the online checkout process. AvaTax identifies the specific products purchased by the consumer to determine if sales taxes apply to those products in that jurisdiction (many products. or both. . 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). sales tax collection at a physical location. Its web-based AvaTax™ service links directly to a merchant’s online shopping cart (via an application programming interface. while the customer is checking out. • If the vendor has chosen AvaTax Returns. The sales tax possibilities of this single transaction are complex. whether the merchant should be collecting sales taxes from an online consumer during the checkout process. • First. AvaTax takes the stress and guesswork out of sales tax. rules and changes across thousands of taxing regions. and remitting payment. or API) and calculates. • AvaTax then performs other tests during the transaction. Avalara’s AvaTax system is maintained by its staff of sales tax and technology professionals who track rates. in real time. such as food. AvaTax does all of this instantly. Imagine the time and resource savings. 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. Avalara simplifies tax collection for ecommerce. If the Californiabased customer owes sales tax.
Web-based software services that provide transparent transactions. Thus making what was not economically feasible in the past for mid-sized business not only affordable. The company does so through integrated on-demand. visit: www. but more accurate as well — all with the latest and most innovative technology available. or chat about AvaTax’s capabilities.780. Get Started.avalara. close to Seattle. Avalara’s mission is to transform the tax process for customers by creating cost-effective state-of-the-art solutions.4848 today. . Avalara’s knowledgeable staff works tirelessly to help customers put the hassles of sales tax compliance out of mind. view online demonstrations.Page 9 of 9 Ecommerce and Sales Tax Legislation Avalara simplifies tax collection for ecommerce with a web-based solution. From Bainbridge Island.com or call 877. accurate tax compliance. scalable sales tax solution. To learn more about pricing. About Avalara A privately held company. Avalara was founded by a team of tax and software industry veterans to fulfill a vision of delivering an affordable. painless administration and effortless reporting.
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