As everyone knows, if you don’t pay sales tax because the seller doesn’t collect it, you are required to pay use tax. But, as everyone knows, individual use tax compliance is very low. And further, as everyone knows, states “need” more money but Quill limits their ability to require out of state sellers without a physical presence to collect their sales taxes.
What to do, what to do?
This two-part article will present a brief survey of the current landscape and an analysis of one proposed Congressional solution.
Some states have taken the Streamlined Sales Tax Project approach. The theory is that if the complexities that concerned the Supreme Court in Quill could be minimized, then requiring out of state sellers to collect sales tax would be constitutional. About half the states with sales taxes are full members, meaning that they share certain requirements for state-level administration of taxes, sourcing rules (determining which jurisdictions’ taxes apply) and definitions, among other things. States retain the right to set their own rates and taxability decisions for the defined items.
Streamlined states use destination sourcing, which basically means that the sale is deemed to take place at the purchaser’s address. This was an incredibly difficult policy for some states to accept, with major ramifications for local sales tax revenues. Take a furniture or appliance store, for example, where most sales are for delivery. Customers come into the store to sit on the sofas and watch the TVs but they don’t take these big-ticket items with them. If sales are taxed at the point of origin, the city where the store is located gets the sales tax revenue (some states identify the warehouse from which it shipped as the origin), while destination sourcing allocates the sales tax revenue to the buyer’s address. Localities had structured their budgets around anticipated sales tax revenues and this was a huge hit.
Destination-based taxation is representative in the sense that consumers, who ultimately pay sales tax, are taxed on and at whatever rate their elected officials decide. On the other hand, the compliance costs of collecting sales taxes are borne by the sellers. A huge downside to requiring remote sellers to collect destination tax is the complexity, which is why the Court in Quill held that states were limited in their ability to force out-of-state sellers to collect their sales taxes. Sales tax is a combination of two factors – rates and taxability – with some 10,000 sales tax jurisdictions nationwide. Things change all the time so that’s an awful lot of moving pieces!
Some states have taken other steps to try to work around Quill’s limits. New York introduced “click-through” nexus, which treats some out of state companies as if they are New York businesses based on an affiliate’s in-state activities. For example, if Amazon pays a New Yorker commissions for purchases that came from a link on a New York website, Amazon has to collect New York sales tax. A number of states have jumped on this bandwagon to require tax collection by businesses that would not otherwise be subject to their reach.
Several states have enacted various use tax notification and reporting schemes. A simple statement at the bottom of an invoice reminding the purchaser that they may be obligated to pay use tax is clearly constitutionally acceptable. Colorado’s reporting law, which also requires that non-Colorado businesses send detailed reports to their Colorado customers and to the state, is still being litigated.
Affiliate nexus laws, which are pretty much an extension of existing agency concepts, and reporting regimes which do not require that the out of state seller actually collect tax, can be viewed as creative ways to comply with Quill. Then there are economic nexus laws such as those enacted by Alabama and South Dakota, which require sales or use tax compliance by businesses with a certain sales volume, regardless of physical presence. Economic nexus is commonly used in income tax but it defiantly violates Quill’s physical presence requirement for sales tax obligations.
Some states have given up waiting for Congress to take up the Quill Court’s invitation to simplify and are hoping the Supreme Court will eventually decide that technology has evolved to a point where Quill is no longer valid, allowing them to require remote sellers to collect their sales or use taxes. Meanwhile on Capitol Hill … Look for part two next week.