sales tax legislation beyond ecommerce

7/29/2019 Sales Tax Legislation Beyond Ecommerce

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Ecommerce

Sales taxlegislation beyond

What every business needs to know

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Page 1 o 9 Sales Tax Legislation Beyond Ecommerce

The world before ecommerce

When Montgomery Ward issued its frst catalog in 1872, sales tax wasnt 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 aecting interstate commerceworks badly or both businesses and the States. From the beginning, the aims ostate 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 oten resisted these requirements, invok-

ing ederal rules protecting interstate commerce. The issue centered on defnitions onexus (physical presence within a taxing jurisdiction that triggers sales tax collectionobligations) set orth in prior rulings. In the 1990s this conlict 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 reerendum 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 didnt stop there.

When the Supreme Court Ruled on Remote Sellers

In 1992 ater more wrangling at the state level, the case rose to the U. S. SupremeCourt (The Quill Corp v. Heitkamp, 504 U.S. 298 (1992) (hereater Quill), resulting in aruling that would guide the collection and remittance o sales tax by remote sellersor decades.

Early Catalogs Pre-Dated Sales Tax

I youve read the news this year, youre aware that Amazon has begun collecting salestax in Caliornia and other states or the very frst time. Maybe youve told yoursel thatyou dont need to worry too much because your company engages in little or no ecom-merce activity.

Well, i thats the case, think again. Why? Because there have been developments atthe ederal level which signiy 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 were headed is critical inormation or all businesses.


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Though the U.S. Supreme Court determined that the nature o Quill Corps 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 (notinterering 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 interere with

that 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 oten so incongruous that many businessesunderstandably throw up their hands and assume that they dont have to collect andremit sales tax in municipalities in which they dont have physical presence. By doingso they unknowingly increase their risk o auditsand associated penalties.

What you dont 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 eect, this resulted in an assumed tax exemption or remote sellerswithout this physical presence.

This assumption is aulty and heres 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 conusion, 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 businesseort?

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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This map shows taxing jurisdictions within the state o Colorado. Considering thateach jurisdiction could have dierent taxability rules as well as tax rates, the complex-ity is somewhat daunting. Unortunately this is just the tip o the iceberg.

This map shows the greater Denver metropolitan area with even more taxing jurisdic-tions and attendant rates and rules. This makes it essentially impossible to consistent-ly determine an accurate sales tax rate and to manage the requent changes to both

jurisdictions and taxability requirements without some orm o powerul automation.

Determining accurate taxability encompasses layer upon layer o complexity.I online retailers could use Quill to quickly calculate where they have nexus(a signifcant physical presence within the state) and those states where they dont,determining nexus would straightorward.

Further Down the Rabbit Hole: theCity o Denver

The State o Colorado:Each Color Represents a DierentTaxing Jurisdiction


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Alas, this is not the case. Determining nexus or ecommerce and remote sellers onlytells a small part o the story. The calculations and analysis needed to measure truetaxability at the product and service level require more time and expertise than mostcompanies possess. In other words, using Quill to assume exemption is a very commonmistake, especially given the changes that are coming at the ederal level.

These changes stem rom the original ruling, in which the High Court calls uponCongress to revisit the issue o physical nexus and potentially overturn Quill. So whilestates are not allowed to impose nexus legislation in conlict with ederal regulations,they are allowed to defne nexus in ways they deem appropriate (as long as they dontcontravene Quill). In other words, remote sellers are required to ollow a myriad orules ar more complex than mere physical presence determinations.

With over 11,000 taxing jurisdictions in the United States, each with its own rules andability to conduct audits, compliance with each is not a trivial task.

Ecommerce & debates about fairness

Quill clarifed the tax obligations o remote sellers and defned physical nexus in orderto reduce the burden o collecting and remitting tax on remote sellers. In turn, thisdefned tax liability without hindering interstate commerce. Justice Whites dissent-ing opinion argued that bright-line nexus benefted remote sellers. Free rom beingrequired to collect sales tax, these entities could charge lower prices than their brick-and-mortar competitors. This inequity ignited debates regarding marketplace unair-ness. Whatever the cause, issues o airness and perceived inequity penetrate tax policydiscussions at every level.

Fueled by this perceived inequity, common arguments levied against online retailersinclude claims that their tax advantage allows them to:

drive mom-and-pop operations out o business

transer tax burden to brick-and-mortar stores

deprive state and local jurisdictions o much needed sales tax revenue

On the lip side, ecommerce analysts and online retail trade groups argue that ecom-merce stimulates the economy by uncovering previously untapped markets, creating

more aordable options (and a reer market) or the consumer. Deenders also notethat shoppers go online not to save on sales tax, but or greater convenience and alarger selection. Nevertheless, the perception o unairness persists.

Lost sales tax revenue attributed to online retail has been the lightning rod or heatedopinion-making on both sides o the issue.

Lost sales tax revenue

attributed to online retail

has been the lightning rod

or heated opinion-making

on both sides o the issue.


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In 2011, states collected over $234 billion dollars in sales tax revenue (31% o total taxrevenue collected). Other than income tax, state and local jurisdictions rely most heav-ily on sales tax to support schools, inrastructure, public-saety or the like. The loss osales tax revenue associated with online retail has become increasingly important inthe ace o declining state revenues, and in light o the fscal crisis o the past ew yearsFollowing the market crash o 2008, many states aced a looming fscal crisis, the likeso which had not been seen in a generation. Between 2008 and 2009, states aceddramatic reductions in overall revenue as well as dramatic budget shortalls (shown tothe let).

At a time when states are recovering rom the great recession there is a heightened

awareness o uncollected revenue (especially in the amounts associated with on-line retail exempted by Quill). Eorts to estimate revenue losses associated with theremote seller exemption are varied. However, a prominent University o Tennesseestudy is the most commonly cited data source. According to the study lost revenueassociated with ecommerce will be $11.4 billion in 2012. When catalog, phone, and allother interstate transactions are included, the Streamlined Sales Tax Governing Boardestimates that number is closer to $23 billion annually.

What states are doing

In 1991, The National Governors Association and the National Conerence o State Leg-islatures ormed the Streamlined Sales Tax Governing Board to simpliy and modern-ize sales and use tax administration in order to substantially reduce the burden o taxcompliance. States that voluntarily participate can petition or ull membership bymeeting specifc requirements to simpliy tax administration.

To qualiy or membership, states must comply with the Streamlined Sales Tax UserAgreement (SST). Twenty-our states to date are ull members, and a number o othersare on their way to ull membership. States in compliance with the SST ollow strictguidelines including the utilization o technology to modernize and actualize efciencyin sales tax administration.

With respect to nexus and remote seller sales tax rules SST specifes that, each SSTmember state is authorized to require all sellers not qualiying or a small seller excep-

tion to collect and remit sales and use taxes This authorization is consistent withlanguage in proposed current ederal legislation.

Federal legislation and the surprising support of former adversaries

Each o the three pieces o ederal legislation beore Congress require states to meetcertain requirements in order to require remote sellers without physical presence tocollect sales tax. Both the Main Street Fairness Act and the Marketplace Fairness Actallow states to require remote sellers without physical presence to collect sales tax ithey join the Streamlined Sales and Use Tax Agreement (SST).

Streamlines Sales Tax (SST)

The 24 states participating in thenational streamlined sales tax eortmeet the ollowing unifed taxability

standards:

1. State level administration osales and use tax collections

2. Uniormity in the stateand local tax bases

3. Uniormity o major taxbase defnitions

4. Central electronicregistration system

5. Simplifcation o stateand local tax rates

6. Uniorm sourcing rules orall taxable transactions

7. Simplifed administrationo exemptions

8. Simplifed tax returns

9. Simplifcation o taxremittance process

10. Protection o consumer privacy

Dramatic Budget Shortalls & StatesLooking or Uncollected Revenue such asSales Tax

Total state budget shortall in each fscall year, in billions o dollars

*Reported to date

Source: CBPP survey, revised June 2012

2002 2003 2004 20050

-50

-100

-150

-200

-$40

-$75 -$80

-$45

-$110

-$191

-$130

-$107

-$55*

2009 2010 2011 2012 2013

Last recession


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Each o these bills also proposes a small seller sales tax exemption, allowed evenwhen businesses have physical nexus. For a summary o the exemption or each billsee sidebar.

For nearly a decade, Amazon.com and other ecommerce leaders ought remote sellersales tax obligations by invoking Quill. Amazons legal battles against paying salestax in states where they did not have nexus are legendary. Amazons fght against col-lecting sales tax in Caliornia was so costly (over $5 million), some claimed the compa-ny eectively high-jacked the legislative process. In 2011 however, Amazon appeared toshit its approach. When news outlets began reporting that Amazon was in the processo negotiating a sales tax agreement within the same state, many were shocked. Oth-ers marked it as the beginning o a wholesale shit in requirements around sales tax

and online retail.

In Governing magazine, Paul Misener, Amazons vice president o global public policy,stated that Federal legislation is the only way to level the playing feld or all sellers.[T]he only way or states to obtain more than a raction o the sales tax revenue that isalready owed, and the only way to ully protect states rights.

Why would an online retailer, previously adamantly against collecting sales tax, nowbe one o the most avid supporters o ederal legislation in avor o it? More important-ly, what does it herald or other online retailers? Many argue that once courts beganruling in avor o states claiming Amazon owed sales tax, the tides turned irrevocably.

In late 2011, early 2012, Amazon leadership moved to accept the inevitable and agreedto begin collecting sales tax. For each o the deals struck with states, there were rippleeects that were elt across the world o ecommerce. While no one can predict what wilhappen with sales tax, it is clear that more local and state jurisdictions are consideringrequiring more remote sellers to collect sales tax in 2013.

Whatever happens, the only certainty is that changes will continue, and the attentionon the issue o uncollected revenue will grow. These actors tend to bolster the eortso the organizations supporting ederal changes to Quill.

O the host o bills proposed during 2012, the Marketplace Fairness Act has bipartisansupport in the Senate, and has been endorsed by organizations ranging rom Amazonand Wal-Mart to the National Governors Association to the United Auto Workers.

How can businesses address these challenges?

Even i the debates about Quill and marketplace equity are sorted out, the difculty odetermining multi-jurisdictional sales tax obligations still seems to require a crystalball and an army o accountants. The best solution or companies o all sizes is toutilize external resources with specialized expertise and technology.

Small seller exemption ineach bill:

Main Street Fairness Act

Small seller exemption determinedby the Streamlined Sales and Use TaxAgreement, which currently exemptsbusinesses with gross annual revenue oless than $500,000.

Marketplace Equity Act

Businesses with gross annual receipts o

less than $1 million nationally or $100,000in the state are exempt.

Marketplace Fairness Act

Businesses with gross annual receipts oless than $500,000 are exempt.[source: : Avalara Blog]


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Just as companies outsource and automate payroll management and other require-ments that are extraneous to their core business, automating sales tax is an aord-able, efcient way to meet the increasingly complex challenges associated with multi-

jurisdictional and remote seller sales tax compliance.

There are multiple providers o outsourced sales tax services. In the business arena, adynamic online solution that provides highly accurate and instantaneous results is theonly viable answer.

Automate sales tax. Save yourself time and money

As this research brie establishes, sales tax is an incredibly complex issue, and theability to utilize manual systems is not easible.

Business entrepreneurs requently grapple with the choice between efciency andexpediency, all while juggling the realities o an increasingly complex business envi-ronment. When it comes to dealing with sales tax, businesses oten hold erroneousopinions such as:

1. Outside the state where Im located, I dont have to worry about sales tax

2. I only need to know and collect one tax rate in additional states where I haveoperations

3. This company has been doing it this way or years so there is no need to change

Ironically, the entrepreneurial energy and technical savvy used to start and maintaina successul business oten dont carry through to internal daily operations. Ratherthan using technology to ulfll sales tax obligations, businesses oten rely on outdatedmanual approaches. Business owners oten assume they can take care o sales taxthemselves.

Why wait to automate?

Given the heated debate surrounding sales tax, is it any wonder that businesses aremore conused than ever about whether to collect sales tax? Or that many businessespreer to delay or ignore addressing the sales tax morass until later? No one likes man-aging sales tax, especially businesses required to collect in multiple states, all with

dierent rates and rules.Whether its dealing with online sales tax collection, sales tax collection at a physi-cal location, or both, AvaTax takes the stress and guesswork out o sales tax. AvalarasAvaTax system is maintained by its sta o sales tax and technology proessionals whotrack rates, rules and changes across thousands o taxing regions.

Imagine the time and resource savings. Imagine automating the collection and remit-tance process in the many jurisdictions in which your business is legally required to becompliant.


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Avalara simplifes tax collection. Its web-based AvaTax service links directly to abusiness online shopping cart (via an application programming interace, or API) andcalculates, in real time, whether the merchant should be collecting sales taxes rom anonline consumer during the checkout process.

Here is an ecommerce scenario that demonstrates how AvaTax addresses these kindso complexities:

An ecommerce merchant is located in New York and sells products to a customer inCaliornia. The sales tax possibilities o this single transaction are complex.

First, AvaTax validates the address in order to accurately determine the sales taxrules or New York and or the Caliornia jurisdiction in which the sales occurs(assuming the vendor has set AvaTax to identiy potential nexus in these states)

Then, AvaTax identifes the specifc products purchased by the consumer todetermine i sales taxes apply to those products in that jurisdiction (many prod-ucts, such as ood, are requently exempt rom sales taxes).

AvaTax then perorms other tests during the transaction, such as determiningthe number and type o products sold within a specifc jurisdiction, and anyobligation to collect sales tax that might be required.

AvaTax does all o this instantly, while the customer is checking out. I the Caliornia-based customer owes sales tax, AvaTax also:

Applies and collects that amount to the total amount due during the onlinecheckout process.

I the vendor has chosen AvaTax Returns, the system also handles flingthe sales tax returns with the applicable Caliornia jurisdictions, and remittingpayment.


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Avalara simplifes taxcollection or ecommercewith a web-basedsolution.

About AvalaraA privately held company, Avalara was ounded by a team o tax and sotware industry veterans to ulfll a vision o delivering an aordable, scalable sales tax solution.

Thus making what was not economically easible in the past or mid-sized business not only aordable, but more accurate as well all with the latest and most innovative

technology available. From Bainbridge Island, close to Seattle, Avalaras knowledgeable sta works tirelessly to help customers put the hassles o sales tax complianceout o mind. Avalaras mission is to transorm the tax process or customers by creating cost-eective state-o-the-art solutions. The company does so through integrated

on-demand, Web-based sotware services that provide transparent transactions, accurate tax compliance, painless administration and e ortless reporting.

Get Started.To learn more about pricing,view online demonstrations,or chat about AvaTaxscapabilities, visit:

www.avalara.com

or call

877.780.4848today.

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