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Will Online Sales Tax Issues Finally Be Put to Rest?

October 15, 2012

By Tony J. Switajewski, CPA
Partner
BlumShapiro

For well over a decade, states have been grappling with the issue of collecting sales tax from online sales.  Growing internet shopping has state tax commissioners scratching their heads trying to hatch ideas for getting in on those sales tax revenues. 

It’s not so much a question of “if” but of “when” internet sales tax will be due from out-of-state retailers (a.k.a. “remote sellers”).  With no federal legislation in place to regulate the collection of these taxes, states have been left to address the issue with no consistent resolution.  And, while many bills have been introduced, they’ve basically gone nowhere.

However, one bill currently being considered in the Massachusetts legislature that has momentum is (H. 3673) An Act to Promote Sales Tax Fairness for Main Street Retailers. Furthermore, at the federal level, the Marketplace Equity Act of 2011 (H.R. 3179) and The Marketplace Fairness Act (S. 1832) are currently up for consideration in U.S. Congress and Senate, respectively. This article briefly examines nexus regarding remote sellers, and the potential creation of significant sales tax revenue for the Commonwealth of Massachusetts.

BACKGROUND

In tax law, nexus describes the connection that a business has with a state that makes the business subject to collection and remittance of sales taxes for sales made within that state. 

There is a U.S. Supreme Court ruling dating back to 1992 (Quill Corp. v. North Dakota, 504 U.S. 298)  wherein the decision was upheld that a company must have physical presence in a state in order to be subject to a sales tax collection obligation in that state. It’s been generally accepted since then that a substantial physical presence in a state is required in order to establish nexus for sales tax purposes, and that a so-called economic presence is not enough. 

Click-through nexus happens when in-state representatives direct internet buyers to an online retailer – the way Amazon conducts transactions. In 2008, New York State enacted Tax Law §1101(b)(8)(vi), popularly referred to as the “Amazon.com law”.  Following New York’s lead, Massachusetts’ neighboring state, Connecticut, among many other states, enacted similar sales tax legislation. The increased focus on capturing this elusive internet sales tax opportunity is largely due to the fact that state coffers are running painfully low.  Thus, Massachusetts H. 3673, An Act to Promote Sales Tax Fairness for Main Street Retailers, has a very strong chance of passing in Massachusetts.

Massachusetts H. 3673 doesn’t address the issues of click-through nexus. Instead, it would allow Massachusetts to become a Streamlined Sales Tax (SST) member (there are over 20 full-member states), which would pave the way for the Commonwealth of Massachusetts to collect sales tax from remote online retailers.  However, for this legislation to be effective, it generally can’t stand alone.  It largely depends on the passage of one of the aforementioned federal bills into law, which could very well be enacted by the end of the current U.S. Congressional session on January 3, 2013.  

IN PURSUIT OF TAX REVENUE

The Massachusetts Main Street Fairness Coalition was formed to promote fairness by eradicating the sales tax loophole in Massachusetts, which allows remote sellers to avoid collection and remittance of the state’s sales tax because they lack a physical presence in the state.  To the Coalition, a sale is a sale – regardless of where or how it is transacted – and therefore sales tax is owed. It’s been an influential catalyst to move this bill forward.

Massachusetts-based businesses that sell to in-state buyers are responsible for collecting and paying Massachusetts sales tax on those sales within the Commonwealth of Massachusetts, whereas a remote retailer, without a physical presence in Massachusetts, is not required to collect sales tax on its sales to Massachusetts residents.  When a physical presence becomes irrelevant in determining nexus for sales tax purposes, there is an expectation that the economic playing field (or, selling field, in this case) will be level for in-state brick and mortar businesses and remote sellers alike.

Recently (9/28/12), the Boston Herald reported that Massachusetts Treasurer Steven Grossman estimated that over $300 million could be collected in taxes from internet sales. He appeared optimistic that a deal with online retailer Amazon.com and Congressional passage of a federal law to allow states to collect online sales taxes nationwide were imminent.

SUMMARY THOUGHTS

All indications appear to point to the “when” and not “if” of nexus for sales tax purposes to expand to remote sellers.  States stand to gain hundreds of millions of dollars in sales taxes currently not paid or collected from growing online business transactions.  Businesses need to be ready to comply with the burdensome task of understanding and complying with the myriad of sales tax rules outside their home states.

While online shoppers may troll for bargains this holiday, they may not enjoy the same level of discounts in the future when they are required to pay sales tax on their online purchases.

Meanwhile, the Commonwealth of Massachusetts stands to benefit tremendously with the passage of these bills.  With millions of dollars at stake and the projections for internet sales’ unstoppable growth, it appears that the cloud of confusion looming over the nexus sales tax internet issue is finally lifting. With the current bills in the Massachusetts legislature and at the federal level gaining momentum, this issue may finally be put to rest. 

Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service or State Tax Authorities, (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to market or promote any transaction or matter addressed herein without the express and written consent of Blum, Shapiro & Company, P.C., (3) Blum, Shapiro & Company, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (4) any fees otherwise payable to Blum, Shapiro & Company, P.C. in connection with this written tax advice are not refundable or contingent on your realization of tax benefits from the advice contained herein.

Tony Switajewski is a tax partner at BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut and Massachusetts. The firm, with nearly 300 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation and financial staffing. The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

 

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