Online Sales Tax Update

Posted by Jay McAninch on September 26, 2013 in Business, Political and Election Briefings

Consumers spent nearly $4 trillion buying products online in 2012, a continuing trend that concerns “brick and mortar” retailers. Online sales are not subject to sales tax, which gives online retailers an advantage over traditional retailers. In the archery industry, “brick and mortar” retailers have long lamented this disadvantage, especially when factoring in the time and money they invest in growing archery and bowhunting in their communities.

The federal government oversees this situation because the Constitution’s commerce clause is supposed to maintain fair interstate transactions. Further, the U.S. Supreme Court stipulates that states cannot compel remote sellers to collect a sales or use tax unless the seller is physically present in the purchaser’s state. After years of inaction, the U.S. Senate in May 2013 approved (69-27) the Marketplace Fairness Act, which compels out-of-state sellers with more than $1 million in remote gross sales the preceding calendar year to collect sales and use taxes. The Obama administration supports the Senate’s action, so now the legislation moves to the House.

The Senate’s Online Sales Tax

I asked Tim Hanford, an ATA friend and renowned tax attorney with more than 25 years on Capitol Hill. for two examples that clarify how the Marketplace Fairness Act would work.

Example (1): A Minnesota online retailer makes sales in 2014 of $400,000 to Minnesota customers, $100,000 to California customers, $300,000 to New York customers, $100,000 to New Hampshire customers, and $300,000 to customers in other states. The Minnesota online retailer would not be subject to any state’s online tax-collection authority in 2015 because it made only $800,000 in remote sales during 2014. Minnesota’s in-state sales are not “remote,” so they don’t factor into the gross receipts. Even so, Minnesota’s in-state sales remain subject to the retailer’s obligation for Minnesota sales-tax collection.

Example (2): Same facts as Example (1) except that remote sales to New Hampshire customers are $325,000. Because the Minnesota retailer had more than $1 million ($1.05 million) of remote sales in 2014, any state meeting the legislation’s requirements could impose a sales-tax obligation on remote sales into the state by the retailer in 2015. A key issue: When determining the $1 million remote sales threshold was satisfied in 2014, it does not matter that some sales were made to buyers in New Hampshire, which has no sales tax.

Status of Legislation

While the Senate passed the legislation, Republicans were split: 21 favoring, 22 opposed. Among the “nays” were Senate minority leader Mitch McConnell of Kentucky, and ranking Finance Committee members Chuck Grassley of Iowa, and Orrin Hatch of Utah. Further, Republican 2016 presidential hopefuls Ted Cruz of Texas, Rand Paul of Kentucky, and Marco Rubio of Florida all voted no. Five Democrats opposed the legislation, including Senate Finance Committee Chair Max Baucus of Montana.

Sen. Cruz’s comments on the legislation were confusing. He accused major companies of complicating things for small online entrepreneurs. “The reason it has passed is because we have a lot of powerful lobbyists in D.C. who are supporting this bill,” Cruz said. “What we are seeing in this bill is Washington ganging up with the giant corporations. You’re seeing Democrats and Republicans arm in arm with the giant corporations.”

Republican governors are split, while the National Governors Association supports the bill as a measure to help all small businesses. Led by Gov. Robert McDonnell of Virginia, the governors of Wisconsin, Maine and Iowa are working to advance this legislation as a source of much-needed state revenues, as well as a boon for small businesses. Opposing the legislation is Gov. Steve Bullock of Montana, who believes the online sales tax would overburden start-up companies.

In the House, the bill’s future is uncertain because the legislation only has 66 co-sponsors (42 Democrat and 24 Republican), and Speaker John Boehner, R-Ohio, appears unlikely to support it. He left it to the House Judiciary Committee, led by Rep. Bob Goodlatte, R-Virginia. Goodlatte is open to the legislation, but worries the tax would allow states to try regulating businesses beyond their borders.

With Congress back for the fall session, Goodlatte is expected to provide a framework for a House version of the bill. An expected change is increasing the gross sales receipts required to trigger the tax.

ATA members should act now if they want to weigh in on this issue. House members, especially key Republicans, must hear from us if we want to see this bill enacted or rejected. What do you think?

Photo Credit: Neff Conner, Flickr Creative Commons