Currently internet retailers are not required to
collect Sales
Tax
for states which they do not have nexus in. The same has always applied to
catalogue sales. Nexus can be a physical
location - meaning an actual store, warehouse or other building, or nexus can
mean the presence of other assets or employees in a particular state. If there is no nexus in a particular state,
there is no requirement to collect Sales Tax from
that state. Many internet sellers have
nexus in only one state - this gives them a distinct competitive advantage over
a store selling the same goods in a different state that must collect Sales Tax. In addition, the store has to pay rent, wages
and other costs to display their merchandise. The store in effect becomes a
showroom for the internet sellers. The
shoppers go to the store to examine the goods, and then buy it cheaper on line because
they don’t have to pay Sales Tax (or stated another way, Sales Tax is not
collected - more on that later).
As a former Tax Audit Administrator for New York State,
and also in my current capacity as a tax consultant, tax fairness is always
key. We all want to pay less tax if
possible, but it’s not fair if one pays less which causes others to pay
more. There is no getting around the
fact that the states’ primary income comes from taxes. The public has to contribute to the state
coffers to allow the state to operate.
Furthermore, it is not news to most of the tax professionals reading
this post, that Sales Tax (or Use Tax) is due on these transactions
already. If the tax is already due, then
what’s the problem? The problem is, that
the tax is due on a voluntary basis.
Instead of the internet seller collecting the tax from an out of state purchaser,
the purchaser is required to voluntarily report the (Use) Tax to their home
state. Again, most of us realize that
this happens only in a small percentage of cases. In fact, many purchasers don’t even understand
that the tax is due. They think internet
purchases are tax free, and someone is trying to levy a new tax here. That, as we know is entirely false. The result is that everyone else has to pay
more in higher income tax rates, or other taxes to make up for the shortfall
that the states need to operate. If the Sales
Tax was
collected on all internet sales, then by simple mathematics other taxes could
be lowered.
People are writing anti-proposal pieces that simply
don’t understand that this is not a new tax, but a tax that doesn’t get paid. See Jessica
Melugin’s article in the Washington Times: “Internet sales taxes attack states’
rights”, where she dramatically cries “…taxation without representation...”(1)
The tax is not due
from the out-of-state seller, it is due from the purchaser, to the state they
live in. They’re just not paying the tax that they owe, putting the burden on
others; that’s the part that isn’t fair.
It’s more like representation without taxation. What are these dissenters saying? They approve of non-payment of tax due? Do they have a better way to collect it? Do they also disapprove of income tax
withholding? Many out of state
businesses are required to withhold income taxes in multiple states.
Why is it that wage earners report their income
properly for income tax purposes? It’s
because there are W-2 forms submitted to the government as well as withholding
tax. People voluntarily file income tax
returns, because the tax has been previously withheld. Sales of securities are reported by financial
institutions to the Federal government on 1099 forms, and the government also
recently required these companies to report purchase amounts, because
individuals often make “errors” reporting their gains or losses. This is not a commentary on human nature, but
it is a known fact that when there is no government control such as W-2 forms
or 1099 forms, where the government has knowledge of a taxable event, many
people will not report or pay the full tax due.
Do the dissenters want a completely voluntary tax system? Where will the revenues come from?
All the states are asking, is that internet sellers
“collect” the appropriate Sales Tax for the state in which their customer is
located. They are not being asked to pay
a new tax. They are being asked to
collect a tax which is already due from the purchaser by law and remit it to
the appropriate state, just as every
employer is asked to withhold and remit tax on an employee’s income. It just ensures that the tax that is due gets
paid. It’s good for everyone because it
reduces the burden for all taxpayers.
People want lower taxes. This
will help to lower taxes.
People have argued that the extra administrative
work of collecting this tax for a small internet retailer would be an undue
burden, costing them additional work and therefore money. (2) They ask that
small retailers should be exempt from this burden, as it will put them out of
business. Sure it’s an additional cost,
and I wouldn’t argue against a threshold, exempting businesses with minimal
gross receipts, but let’s not forget that these small internet businesses don’t
have showrooms in multiple states, and their customers might first be shopping
in a competitor’s store, enjoying the assistance of that competitor’s
employee. Then the customer goes home
and clicks on a website to save the Sales Tax! That doesn’t support business!
We know recordkeeping is a necessary burden on all
businesses, and this burden changes with the times. When Sales Tax nexus rules were written,
there was no internet. If a company
sells something to be shipped out of state, there is no requirement to collect
Sales Tax for that state if there is no nexus.
Years ago this was an insignificant part of business. Prior to the internet explosion, this law only
affected companies with catalogue sales.
In the Matter of Bellas Hess, and Matter of Quill, the Supreme Court
found that these companies had no nexus in the challenging states, therefore
they were not required to collect Sales Tax.
That was the correct result for that time. Of course the tax was still due in the
purchasers state, but due to the insignificance, it wasn’t missed much. Now as we know, we have a day called cyber Monday,
and December may come to be called Decyber, because of the amount of business
transacted over the internet. It’s quite
a significant amount, and as the percentage of cyber revenues go up, Sales Tax
collections go down.
According to Senator
Durbin of Illinois: States will lose an estimated $24 billion in 2012 because
of uncollected sales taxes from Internet and catalog sales…(2)
How should the states recover that shortfall, by raising
Income Tax rates? That doesn’t make
sense, because this shortfall is a result of tax revenue that is already due,
but is not being paid. It makes much
more sense to collect the tax that is already due than to create new taxes.
Many large businesses already collect Sales Taxes on
much of their internet sales because they have nexus in many states. Small internet retailers already collect and
remit sales tax in the state in which they are physically located (except in the five states that do not charge sales tax: Delaware, New
Hampshire, Montana, Oregon and Alaska).
Is there an added cost to require businesses to collect Sales Tax for multiple
states? Sure there is – but not $24
billion per year.
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(1)
MELUGIN: Internet sales taxes attack states’ rights (Government
intervention kills competition) By Jessica
Melugin: The Washington
Times Friday, November 30, 2012
