Capturing Online Sales and Use Tax: The Battle Continues
Have you purchased something online this past year, month or day? You probably looked at the cost of the item purchased, but did you pay attention to whether you paid taxes on your purchases? Sorry to tell you this, but just because a sales tax was not charged does not mean you don’t owe a tax on the transaction.
All states that impose sales taxes also require purchasers to remit use tax on any taxable purchases if sales tax is not paid. Many, if not most, consumers are unaware of the use tax and, therefore, do not comply. It is almost impossible for state taxing authorities to enforce these laws with respect to individual consumers (but businesses often are audited for use tax).
The problem (or salvation, depending on your perspective) is that the states cannot easily do this, and many businesses cannot easily calculate, collect and remit such taxes. The state and local sales and use tax system is very complicated, with many of the estimated 9,600 state and local taxing jurisdictions applying their own exemptions and methodologies. And under the current law of the land, a seller must have a physical presence (“nexus” or connection) in the state for that state to require the seller to collect and remit sales and use taxes. However, the physical presence requirement can be met by a third-party performing certain activities on behalf of an out-of-state retailer.
Over the past few years, 13 states have enacted legislation requiring certain retailers without a physical presence in their state to collect and remit tax on sales to state residents – if the retailer compensates in-state “associates” for purchases resulting from a buyer clicking on a link on that associate’s website. These click-through nexus state statutes are controversial and have been challenged by taxpayers in multiple states. Most notably, Amazon.com and Overstock.com lost in the New York Supreme Court, but the Performance Marketing Association won in the Illinois Supreme Court, which ruled that the Illinois law violated a federal law that prohibits “discriminatory taxes” on Internet transactions.
For now, big businesses like Amazon are making deals in states, building warehouses in exchange for agreeing to collect state sales taxes, which Amazon now collects in 20 states.
With so much variation and litigation involving the states’ sales and use tax rules, federal lawmakers have proposed a national solution, the Marketplace Fairness Act of 2013, which would authorize certain states to require remote sellers (with annual remote sales exceeding $1 million) to collect and remit sales and use taxes, even if the seller has no physical presence in the state.
The AICPA suggested to Congress (without taking a position) that the bill provide greater simplification, uniformity and consistency. So far, the MFA bill has passed in the U.S. Senate, and is awaiting action by the House Judiciary Committee, which is holding a hearing on it today. If enacted, MFA would affect the sales and use tax compliance operations of nearly every business and consumer in the United States. Depending on your state’s rules and whether the seller has nexus in your state, you may or may not be paying sales or use tax, but that could change.
Eileen Reichenberg Sherr, CPA, MST, Senior Technical Manager – Taxation, American Institute of CPAs. Eileen staffs the State and Local Taxation Technical Resource Panel, the Trust, Estate and Gift Tax Technical Resource Panel and the Tax Legislation and Policy Committee. She is responsible for the development and submission of comments to Congress, Treasury and the IRS. She has a Master’s degree in Taxation from The George Washington University.
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