On-Line Sales Taxes

by wj

The big news this week appears to center around Michael Cohen, James Comey, and the usual political soap opera that our country seems to have become. But there is something else of interest going on -- something which will actually have a noticable impact on most of us.

Today, the Supreme Court heard oral arguments on South Dakota v. Wayfair which concerns whether a state can require an on-line retailer with no physical presence in the state to collect state sales taxes. Currently (under the Court's decision in 1992 in Quill v. North Dakota), only those retailers with a physical presence in a state, for example a warehouse, can be required to collect tax. But this may change that.

At the moment, my state at least requires me to pay the sales taxes for on-line purchases when filing my state income tax. The problem, of course, is that nobody keeps track of on-line purchases for that. Personally, I would have no problem paying the tax. What I have a problem with is doing the administration and paperwork. So if the retailer, like every other retailer in the state, would collect the tax, that would be fine with me. The states certainly need the revenue, and it definitely seems like a leveling-the-playing-field approach.

And it's not like it's really going to be a huge burden for the on-line retailers. The software to calculate the relevant sales tax is trivial. For a computer, keeping a running total of the amounts owed to 50 different states (or even a bunch of smaller jurisdictions which may impose additional sales taxes) is likewise trivial. From the amicus briefs being filed, you'd think that the on-line retailers believe having to collect sales taxes would make a huge hit on their business. But I just cannot believe that there will be that much impact. Anybody have a different perspective?

Comments

[Percysowner]

I happen to live in a state where Amazon has a return and pickup department, so I get tax added on to my orders all the time*. This has not changed one thing about my ordering from Amazon. Heck I prefer it, because then I don't have to guess at what I spent at Amazon when I do my taxes.

*I probably don't pay on EVERYTHING I order from Amazon because some of my orders are through dealers who don't have a physical presence in my state. I have zero problem with them calculating and paying taxes to my state and my county, if it comes down to it.

[Ugh]

I think the issues with collecting and remitting the tax will hit smaller retailers, whether through Etsy, or Ebay, or Amazon, or their own website. Even though South Dakota's statute has a de minimis rule where if you're below a certain $ amount or transaction #, it's still a pretty to trip the threshold. Then you're stuck with determining the proper amount of state and local sales tax with every order - perhaps there is software for that, probably, but it's not super free or even cheap and needs constant updates.

When SCOTUS granted cert I think the tax bar was close to unanimity they would overrule Quill. But now I think people have swung the other way to thinking Quill will stand because (a) what will the legal standard be if not physical presence, and (b) there's a whole mess of laws that would become retroactively Constitutional which would be a big mess.

Full disclosure: my organization filed an amicus brief in the case.

[CharlesWT]

Supreme Court Weighs Widening States’ Reach on Online Sales Taxes: Smaller vendors on Amazon and other platforms could find their goods subject to levies

States Angle for More Sales Tax, Small Businesses and Inflation Be Damned

In sales tax battle, Supreme Court must side with small businesses

Previewing SCOTUS South Dakota v. Wayfair Online Sales Tax Case

Tax Foundation Brief in Wayfair Online Sales Tax Case: SCOTUS Should Set Meaningful Limits on State Taxing Power

[Ugh]

Another issue at play in the SCOTUS decision, albeit obliquely and perhaps not even mentioned, is the global move (led by the EU) to tax "digital" companies and transactions, whether through some sort of "significant economic presence" standard for a permanent establishment that wouldn't require a physical presence, or some sort of receipts based excise tax (essentially a VAT only on digital services).

The current definition of a permanent establishment is a rough approximation of Quill, where you can't have one unless you have a physical presence inside a country - either directly or through an agent.

The US has for 5 years now been arguing against the digital approaches, for both principled and self interested reasons. If SCOTUS says its OK for states to tax out of state businesses that lack an in-state physical presence, then that will give other countries another argument for their approach to digital companies/transactions.

Perhaps that is how it should be - out-of-state and out-of-country (nonresident) companies are making a lot of $ by selling to customers in those states/counties, and it's not unreasonable for states to want to tax those sales, and the "use" tax approach has largely failed and is less administrable and a larger compliance burden than having the seller collect and remit.

[JanieM]

At the moment, my state at least requires me to pay the sales taxes for on-line purchases when filing my state income tax. The problem, of course, is that nobody keeps track of on-line purchases for that. Personally, I would have no problem paying the tax. What I have a problem with is doing the administration and paperwork.

My state does that too, and I too have no problem with the requirement to pay the tax.

I record all my expenditures in a spreadsheet, not individually but by month/category. It's no big deal to keep a separate column listing charge purchases, and to to flag the ones I've made online. Now that Amazon has started collecting tax it's even less of a big deal.

[wj]

In our digital world, the whole "physical presence" thing needs a re-think anyway. Sales tax happens to be where the rubber is currently meeting the road. But as Ugh notes, there are implications for things like subpoenas as well.

Can you subpoena my records if the cloud servers are (carefully and deliberately!) located in a country which won't execute the subpoena? For that matter, if you want to require records to be produced, how do you even figure out where, in the entire world the particular bits are located? Especially if, as is entirely possible, parts of a document may be "physically" located in multiple jurisdictions.

Like I say, the whole question needs some serious rethinking.

[wj]

I record all my expenditures in a spreadsheet

Janie, you do know there are treatments for OCD, right? ;-)

[Pro Bono]

The Supreme Court is going to study the constitution with the aim of discerning whether the framers intended states to be able to require online retailers to collect tax for them?

Could there possibly be a better way to resolve the issue?

[Ugh]

Could there possibly be a better way to resolve the issue?

One of the things the Court grappled with/raised today is that Congress was well within its powers to rewrite/overrule/amend the standard in Quill (since it's a dormant commerce clause rule), but hasn't in the intervening 27 years. So....does that mean Congress likes the Quill rule or what?

[wj]

So....does that mean Congress likes the Quill rule or what?

Most likely that means that Congress was a) clueless, b) too busy posturing to actually legislate, or c) both.

[Snarki, child of Loki]

It's seemed to me, for some years now, that there is a real opportunity for an internet company to keep track of all those sales tax jurisdictions, and handle the whole "collect the tax, remit to the right place" operation. Maybe a division of Paypal.

Yes, Amazon can do it on it's own, but Amazon has the revenue of a medium sized country.

If they could generate a statement of "you paid $$$ in the past calender year", that would be a bonus.

[Ugh]

https://www.vertexinc.com/solutions/sales-use-tax

Sales & Use Tax Calculation
No more manual calculations. Automate and standardize taxability and calculation on every sales and purchase transaction on every product in every jurisdiction.

wonder how much it costs tho'

[cleek]

handling sales tax for a small retailer (ex. a hobby/side biz) is a total nightmare.

requiring custom software is not a great solution.

[Nigel]

Regarding small traders, while the European VAT is in some ways an abominable system, it does at least have the merit of reasonable thresholds:
https://www.gov.uk/government/publications/vat-maintain-thresholds-for-2-years-from-1-april-2018/vat-maintain-thresholds-for-2-years-from-1-april-2018

[byomtov]

I'm a little dubious of the complexity argument. Yes, it's complicated, but surely the large retailers can do it, and surely there would be software packages available. After all, income taxes are pretty complicated too, yet TurboTax does a fine job at a reasonable price.

But if that doesn't work, there is a simper solution. Require the states to set up a simplified version of the sales tax. Let's say they set a fixed rate statewide, or even by zip code (there are 41,680 codesto allow for local variations, and a list of exclusions. Online retailers use that to collect taxes. That's not that hard. It won't be an exact match to the taxes paid by in-state retailers, but it will be close.

[Vec]

I run the website for a small (~20 employees) online retailer and I can confirm that collecting state sales tax would be a nightmare.

First there's an inherent problems that online retailers face that brick and mortar stores don't; namely we would have to comply with 50 different state tax codes from day 1. And it's not just keeping a list of the tax rates. States disagree amongst themselves about which products are exempt or otherwise taxed specially. A computer can do all the right math at purchase time, but somebody still has to do all the data entry. And it's not just a one time expense either. 50 states means 50 times as many changes to the law to keep track of. What might be an annual chore for a physical retailer is a weekly expense for us. And that's all assuming the relevant statutes are even written in a way that can directly be converted to computer code, which is a distressingly deep rathole all by itself.

Second, a lot of off the shelf e-commerce software isn't capable of charging taxes right now. The code for that will have to be written and existing sits will all have to be updated. Expense aside, that would be hugely time consuming. A rule change tomorrow is going to mean years of work and confusion and mess before we can expect the whole industry to comply. There's no plausible migration path that doesn't involve some stores collecting taxes and others not, with all the customer hostile witness that implies.

It wouldn't be a big issue for Amazon, but requiring us to collect sales tax would be a huge blow to the digital equivalent of Main Street.

[Michael Cain]

What Vec said.

Keeping the data current by address for the rates, excluded items, and the proper places to submit the tax collected, is a mess. If my street address is the basis for calculating the correct tax, there is the state tax, the city tax, the county tax, and taxes for a number of special districts. Last year the legislature came close to exempting diapers. My city now requires that sales taxes be submitted through their online system. If you are a provider of sales tax software/data, your data must be submitted to the state in the proper format for validation before it can be used to calculate the amount of taxes.

[JanieM]

This reminds me of two other internet issues:

1 -- security, which is becoming a huge burden for smaller companies, as has been mentioned here fairly recently. Not that we don't need better security, just that it doesn't seem like we've figured out how to do it in a way that is both effective and "affordable" (whatever that means). And...

2 -- payment for content.

I am as bad as anyone in having come to expect all-day entertainment (using the term loosely) for nothing but the cost of my internet connection. For years I have said that I'd be willing to pay for this windfall, but the full subscription price for all the sites I click to now and then is too much. Some system that had me pay proportionally to my clicks might make sense. Except, of course, that I don't want to be tracked. ;-)

Paying by the click would probably inspire me to manage my random websurfing, too.

There are a couple of sites I visit frequently that have recently started prompting for removal of adblockers, though without then actually blocking access if you don't remove the block. I tried removing the block on a couple of sites and in short order got some malware via an ad. Back to the adblocker.......

[Vec]

Security isn't "affordable" because attackers have a huge structural advantage. It's a game that I have to win every round, whereas the attacker only has to win once. And they can play another round whenever they want, as often as they want. I don't have to be good, I have to be perfect.

The solution is to just not keep anything worth stealing, but that means no customer database. No customer database means no targeted marketing. And since we don't have a physical storefront that people can pass by no targeted marketing means no new customers and we lay off half our staff.

It really sucks but there's not much we can do about it that won't end up turning online retail into the kind of thing that only giant megacorps are able to do.

[wj]

So, if collecting sales tax for online sales isn't feasible, what is the alternative? Obviously the only other way to level the playing field is to eliminate sales taxes altogether. OK, maybe not on things like restaurant meals, where you have to be present to buy. But mostly.

But that means replacing them with some other form of funding for state and local governments. Any suggestions for what? Any ideas on the feasibility of doing so?

[sapient]

Any suggestions for what? Any ideas on the feasibility of doing so?

Income and property taxes seem to work well.

[wj]

Sure. But you'd have to raise them. Substantially. Even if you bundled the change in a single bill, passing it would be a challenge.

[CharlesWT]

One suggestion that has been made is for a single agency to collect a fixed rate for all states and parcel the collections out to them.

[cleek]

tax package delivery?

all those online orders still need to get to your door.

[byomtov]

In line with Charles' suggestion, you could let each state set a fixed rate collected by the state revenue department and then parceled out however they like. The retailers would pay the 6% or whatever, and maybe provide sales by zip code or some other breakdown.

Possibly they could provide a list of exemptions as well. That doesn't seem to have more than say, a TurboTax level of complexity for retailers.

[wj]

Before we totally drift away from this, I want to thank everybody for educating me on this. It's obviously more complex than I realized. I think we still need to thrash out something better than the current legal situation, but what the solution might be I don't know.

[Vec]

Intuit (makers of TurboTax) employs a couple of thousands engineers. We employ two. "A turbo tax level of complexity" is roughly a thousand times as complicated as what a small business has the manpower to consider writing.

And TurboTax can be relatively cheap because there are hundreds of millions of taxpayers to split the cost between. An of the shelf solution that happens to work with our existing infrastructure may only have a potential audience of a few thousand businesses. It wouldn't be unusual for that sort of software package to cost 100 grand. A year.

I don't mean to sound defeatist, but in my experience most people dramatically underestimate how much work goes into building and maintaining software.

[Tony P.]

cleek: tax package delivery?

Beat me to it. I don't know of any mom-and-pop delivery services, and I'm sure FedEx, UPS, USPS all have a "physical presence" in every state.

--TP

[Michael Cain]

In line with Charles' suggestion, you could let each state set a fixed rate collected by the state revenue department and then parceled out however they like. The retailers would pay the 6% or whatever, and maybe provide sales by zip code or some other breakdown.

I'm not disagreeing in principle, but like so much tax policy, the devil is in the details.

Here you have to deal with the situation where various jurisdictions that overlap in potentially odd ways want to set different tax and service levels. For example, we have a scientific and cultural facilities district made up of Denver and six surrounding counties. It has its own authority to levy a sales tax. It is intentionally distinct from the cities and counties so that it can make district-wide decisions not subject to the whims of county commissioners or city councils. That sort of situation doesn't map well into a uniform state-wide sales tax rate.

I'd have to do some research to be sure, but based on my time on the state legislative staff here, I believe there would be some tricky surgery required on the state constitution, which has a distinct bias towards local control.

[byomtov]

Vec,

I have spent a lot of time in the software business. I know what it takes to deliver a solid product. I don't imagine that small retailers could do it by themselves, but I do think a commercial product could be developed that would sell for a sensible price.

As I suggested, it wouldn't have to cover every contingency. Averages get you close enough. The idea is to protect physical retailers and generate some revenue.

Michael,

Yes. If the online retailers had to deal with every dot and squiggle in local sales taxes it would be impossible. But I don't think they should have to.

Fundamentally, the argument here is, "We shouldn't have to pay this tax because it's too hard."

But where are the proposals for simplification? Couldn't Congress set up a national sales tax on interstate retail sales, online or other, and distribute the proceeds to the states? Is it too much to ask online retailers to provide a state-by-state breakdown of their sales?

[sapient]

Income and property taxes seem to work well. says sapient.

Sure. But you'd have to raise them. Substantially. Even if you bundled the change in a single bill, passing it would be a challenge. says wj.

You and your Republicans, whatever that affiliation actually means to you, have to get on board with taxes to pay for government. Sales tax is regressive and complicated. Income tax is progressive and easy. Figure out the cost of the government you want, and charge it from income and property. Not that hard.

[Vec]

> As I suggested, it wouldn't have to cover every contingency. Averages get you close enough.

I'm not a lawyer, but I'm pretty sure what you're suggesting is tax evasion.

[Ugh]

Maybe we need a push to harmonize/simplify state sales tax laws.

[sapient]

Maybe we need a push to harmonize/simplify state sales tax laws.

That may have been possible in what used to be the UNITED States. Not so much anymore.

[Michael Cain]

That may have been possible in what used to be the UNITED States. Not so much anymore.

It was never going to be easy. Whether the courts would find that Congress could coerce state government organization and sales tax structures after some decades of not interfering* is an interesting question. I would argue that there has never been a point where that would have been a slam dunk. Particularly interesting now, post NFIB v. Sebelius.

* In Arizona v. Arizona the SCOTUS didn't come right out and say it, but the ruling was essentially that the federal government (and Congress in particular) could have disallowed citizen initiatives a hundred years ago, but couldn't change their minds at this point.

[wj]

OK, it appears that we've establishment (i.e. I've learned) that requiring sells to collect sales tax for online purchases would be a serious problem.

But if the Supreme Court rules that they can, I'd say it's pretty much a certainty that many of them will. So then what happens?

I guess Congress could enact a law (well, in theory they could bestir themselves) saying that interstate retail commerce, which internet sales without a physical presence must be, cannot be subject to sales tax. But until and unless they do, what happens? Not what should happen, or what will be the ill effects. Just what actually does happen?

[Pro Bono]

The EU operates of system of "distance selling thresholds" under which sales by online retailers to customers in another EU country can be treated for VAT purposes as being local, up to to a threshold for each country, currently E35,000 or higher, depending on the country.

However, VAT has less local variation than US sales taxes. The EU seeks to harmonise VAT as much as its member countries will tolerate, while leaving income tax regimes entirely at its members' discretion. It looks unworkable to do it the other way round.

[byomtov]

Vec,

No, I'm not suggesting tax evasion. I'm suggesting legislation that offers an approach to paying sales taxes that is simpler than dealing with all the minutiae yet provides roughly the same revenue.

[CharlesWT]

"Besides, states are overestimating the revenue they'd get from the taxes. Internet sales are still a small share of overall sales, and taxing them wouldn't make much difference. According to a 2017 report by the Government Accountability Office, online sales represent less than 10 percent of retail sales. Also, the 100 biggest online retailers already tax roughly 90 percent of their sales. Desperate lawmakers shouldn't expect to collect any more than 2 to 4 percent of total state and local government tax revenues this way, according to the GAO, were Quill to be reversed."
The Supreme Court Eyes Online Sales Taxes: Let’s hope the High Court gets it right.

[Nigel]

Fundamentally, the argument here is, "We shouldn't have to pay this tax because it's too hard."...

No, I think it rather that the burden/costs of collecting such a tax ought not to be disproportionally high compared to the likely revenue raised.

(Which to some extent is the rationale for a VAT turnover threshold.)

[Marty]

ej, I dudpect they would have to use a system like https://www.taxjar.com/api/ either with the payment sydtems like Square that its already integrated eith or implement the api. This is really not an unsolvable problem. Their local systems already do this, they will just have to upgrade.

Its a cost hit not a daunting problem to solve.

[Marty]

Well ej is really wj and I really meant suspect. I will not ever be good at this on a phone.

[byomtov]

Nigel,

I think it rather that the burden/costs of collecting such a tax ought not to be disproportionally high compared to the likely revenue raised.

That's fair. So simplify and reduce the costs.

I do understand, from Michael's comments, that doing what I suggested at the state level is likely to be impossible. But a single national approach does not seem impractical. (Except that it will never pass.)

[wj]

Thanks, Marty. That's what I was envisioning -- I just got the impression here that such a thing was not likely to be available at a reasonable price.

And I completely agree that trying to type on a phone is the pits. Can all those kids who are texting like mad really be that much more dexterous????

[Vec]

So to push back on Marty's suggestion just a bit, let me try and illustrate with a thought experiment how hard this problem looks from where I'm sitting and why the kind of API integration he's recommending isn't as complete of a solution as it looks like at first glance.

We're a Colorado based company that mostly sells computers. Imagine the city of Atlanta (to pick a random example) decides they want to add an additional 2% sales tax on electronics sales, over and above whatever their normal municipal sales tax is. Maybe they're going to use the proceeds to pay for vocational training or something. The new law is widely publicized in Atlanta local news, which almost nobody in Colorado pays any attention to.

The API docs for the service Marty linked provide about a dozen special categories (https://developers.taxjar.com/api/reference/#categories) with instructions to omit the category if none apply. There's not a category for electronics or computing devices, so I'm going to write our integration to not specify the type of goods we're selling. The API then provides us the base tax rate for our sales, since we're not able to provide it enough information to do otherwise.

Fast forward five years and we've sold a few dozen computers to Georgians without collecting this levy. We receive notice from whoever the taxing authority for Atlanta is that we owe them money. Or, worse yet, the first we learn there's a problem is when we start having fines and penalties applied. Suddenly we find ourselves in legal proceedings a thousand miles away. Somehow I doubt that they'll accept that we were just following this company's API documentation as an excuse.

And we're getting off relatively easy. We don't sell anything that some jurisdictions would classify as a "prepared food" and others would specify as "candy", for example.

In all sincerity I'd prefer for companies like mine to pay their fair share. And I'm not at all opposed to making a best faith effort to follow any and all regulations that I'm aware of. My concern is that regulatory compliance is an area where "meh, good enough" isn't nearly good enough. I can't guarantee that I'm complying with all the relevant laws and regulations, just the ones I happen to know about that happen to fit cleanly into the assumptions about things like category that the data provider we use is making on our behalf.

[wj]

It appears that we aren't the only ones talking about this. From today's Washington Post:

In May 2013, the Senate voted 69 to 27 to pass the Marketplace Fairness Act, which would have authorized states to collect sales taxes from out-of-state retailers who conduct more than $1 million in remote sales nationwide each year. The bill also required states to simplify sales-tax compliance as a precondition for their expanded sales-tax authority. But Rep. Bob Goodlatte (R-Va.), the chairman of the Judiciary Committee, refused to bring the bill to a vote.

So perhaps there are approaches which we haven't looked at here.

I particularly note the threshold of $1 million in sales. That would seem to relieve the burden on small companies.

[eeyn]

If they insist on doing this, there should be some rules so that it's not a giant hassle and so that small businesses don't inadvertently violate the law - in other words 100% automated once the product and buyer's address are given. Example rules:

1. A new local tax is only enforceable if it's registered in a national database six months before the effective date.

2. The database is public and in a standardized, unlicensed format, so that the open source guys can have a shot at providing software also.

3. The tax has to be fully describable in terms of the database, which would have rates, a list of zip codes, and list of product categories. No snowflake stuff that needs a text description, manual intervention, or judgment calls.

4. No messing around with exemptions for specific buyers. Organizations that are tax exempt in some particular jurisdictions will need to keep records and go get a refund on their own.

5. All tax payments are sent to a national clearinghouse that does the distribution to the 12,000 local taxing jurisdictions, and takes a cut for the service.

6. Please, no creation of yet another federal law enforcement agency authorized to get warrants and kick in doors. States can do enforcement through compacts, extradition, etc.

[Priest]

For an extra example of "how the eff do we keep track of THAT?", for a number of years prior to last year, Georgia had a one-weekend-in-August sales tax holiday as a Back to School Special, with lists of what items were and were not exempt from state (not county, municipal, or transit) sales tax.

[wj]

It does seem like a bit of tax simplification may be required. Which strikes me as a plus. Less focus on micro-managing the economy.

[BigHank53]

Virginia has annual tax holidays for back-to-school items. They have also had tax holidays for energy-efficient appliances and disaster prep supplies. Plus a lower tax rate on food items. There are thousands of tax categories spread across the nation.

[wj]

It occurs to me to wonder. All these places, with their different sales tax systems. Nobody calculates the tax manually. They've all got software that does it.

So the obvious question would be, How many companies are there, nationwide, that are in the business of supplying that software? I'm guessing it's not that many. If I'm right, that means they're already set up to deal with all the various tax regimes. All that would be required is to check ZIP codes to see which one to use.