RILA supports federal legislation that would grant states the authority to require businesses to collect and remit, through a simplified system, state sales and use taxes on remote sales, including sales made over the Internet and through other remote methods. RILA also supports state action seeking to allow states collection authority by establishing nexus for online-only retailers through various means, or through direct state assessments of online-only retailers that have established facilities in a given state, as stop-gap measures until federal action to level the playing field can be enacted. Today, brick-and-mortar retailers are required to collect sales taxes while many online and catalog retailers are not. This difference is not only unfair to brick-and-mortar retailers, which create jobs in the community, but it is also costing states and localities, which are already facing severe budget crises, billions of dollars in lost revenue that could benefit vital public services and/or lower state tax rates.
Faced with significant budget deficits caused by the recent recession and slow economic recovery, states have been grappling with steep drop offs in revenues, which has prompted many states to consider various approaches to crack down on the sales-tax collection loophole enjoyed by online-only retailers. States like New York, North Carolina, Rhode Island, and most recently, California, Illinois, Connecticut, Vermont and Arkansas, have enacted affiliate-nexus legislation, while other states, like California, Texas, Oklahoma and South Dakota have taken steps to expand their nexus definitions to require businesses with a sufficient connection to the state to collect sales tax. Colorado has adopted a more contentious requirement that online retailers (not already collecting sales taxes) report to state tax authorities regarding purchases made by state residents, which is currently subject to an injunction pending the outcome of litigation challenging the statute. The State of North Carolina has taken a similar approach by administrative action. Legislatures in many other states have considered one or more of these approaches during the 2011 legislative sessions. At the federal level, a new approach to provide states with sales-tax collection authority has been introduced in both Houses of Congress, which recognizes the states’ right to enforce their sales tax collection laws while leveling the playing field for brick-and-mortar retailers. On October 13, 2011, Rep. Steve Womack (R-AR) and Rep. Jackie Speier (D-CA) introduced the Marketplace Equity Act of 2011 (H.R. 3179), along with a strong bipartisan group of cosponsors. /1/ In the Senate, Sen. Mike Enzi (R-WY), Sen. Richard Durbin (D-IL) and Sen. Lamar Alexander (R-TN), introduced the Marketplace Fairness Act 2011 (S.1832) on November 9, 2011, also with strong bipartisan cosponsorship. /2/ Both bills would provide a state with authority to require out-of-state businesses to collect sales taxes if the state implements specified minimum simplification requirements, including an exemption for small businesses, an easily identifiable tax rate, uniform tax-base rules, and centralized filing and remittance of the sales taxes withheld. The bills would also provide collection authority for states opting to join the Streamlined Sales and Use Tax Agreement, which has been the focus of the Main Street Fairness Act (MSFA), introduced earlier this year by Sen. Durbin and Rep. John Conyers (D-MI) and Peter Welch (D-VT) – S. 1452 /3/ and H.R. 2701. /4/
The House Judiciary Committee, which has jurisdiction over sales-tax collection legislation, held a hearing on November 30, 2011, to examine the Internet sales tax collection issue and the need for a federal solution. RILA secured the testimony of a small business owner from Michigan who provided the perspective of a brick-and-mortar retailer struggling to compete with online-only giants that do not collect sales tax in every state.
Streamlined Sales Tax Project
The Streamlined Sales and Use Tax Agreement (SSUTA) /5/ is an agreement among participating states that simplifies and modernizes state sales and use tax laws. The agreement was developed in 2002 in response to two U.S. Supreme Court rulings – National Bellas Hess v. Department of Revenue of the State of Illinois /6/ and Quill Corp. v. North Dakota /7/ – holding that remote sellers could only be required to collect sales tax from customers in states where the sellers have a physical presence. With more than 7,500 state and local jurisdictions collecting sales tax at that time – many with different rates, different kinds of taxable items, and different definitions – the Court recognized that requirements on out-of-state merchants to collect and remit state and local sales taxes were unfair and overly burdensome.
Responding to this situation, 30 states and the District of Columbia – working in conjunction with the business community – approved the SSUTA on November 12, 2002. The agreement simplifies state and local sales tax systems, limits the burdens on interstate commerce, levels the playing field between local and out-of-state merchants, and reduces administrative costs.
Today, 24 states /8/ have enacted legislation to conform their tax laws and implement the requirements of the SSUTA. Legislation has been introduced in additional states to expand the SSUTA’s membership. Sellers also support the SSUTA as evidenced by the more than 1,100 companies volunteering to take advantage of its streamlined compliance requirements. In return, those companies have collected more than $500 million in state and local revenues that would not otherwise have been collected. It is widely accepted, however, that these revenues constitute a small fraction of the amount of sales tax that goes uncollected. Some studies estimate that states lose as much as $23 billion each year in uncollected sales tax.
The SSUTA does not impose a new tax on Internet commerce; it merely provides states with the mechanism to collect legally owed sales taxes that currently go uncollected since few consumers understand that they are obligated to pay the tax directly to their state if the online merchant does not collect sales taxes. Because not all states are likely to join the SSUTA, a comprehensive federal solution now also includes a non-SSUTA avenue for states to begin collecting remote sales taxes. /9/
State Legislative and Administrative Efforts
Without federal legislation, a growing number of states have turned to alternative approaches to collect their sales taxes from out-of-state vendors. Overall, these individual state efforts highlight the significant disadvantage that brick-and-mortar retailers face in the Internet marketplace and the difficult challenges states face in collecting sales taxes due on sales from out-of-state vendors.
The New York affiliate-nexus statute is currently being challenged in New York State court on the grounds that it violates the Commerce Clause of the U.S. Constitution as defined by the 1992 Supreme Court case. Last year, the New York Supreme Court Appellate Division released its ruling on Amazon’s (and Overstock’s) appeal upholding the lower court’s finding that the parties do not have a case that the states’ affiliate-nexus statute is unconstitutional on its face. The court also remanded the case back to the trial court (New York Supreme Court Trial Division) for further proceedings on the specific facts of the case to determine if Amazon’s relationship with its affiliates constitutes actual solicitation and sales to Amazon, thereby establishing sufficient nexus OR if the relationship is merely advertising, which would not be considered sufficient nexus to require Amazon to collect New York sales taxes.
As expected, several companies affected by Colorado’s reporting law have initiated a lawsuit in an effort to overturn the reporting requirement. The Federal court overseeing the litigation issued an injunction in January 2011 against the state’s implementation of the statute until the litigation is decided. Amazon also sued North Carolina in response to the state’s request for similar information on purchases made by North Carolina residents. The litigation gained the support of the American Civil Liberties Union as the case centers on consumer privacy and the First Amendment rights of North Carolina residents. The Federal District Court (Western District of Washington) found that while North Carolina had overstepped privacy boundaries in its broad request, the state could still make a more limited request from online retailers that could include name, address and total purchase amount, which would enable the state to collect the lawful, but to date practically unenforceable, sales taxes directly from its residents.
In September 2010, the Texas comptroller assessed Amazon for roughly $260 million in uncollected sale taxes from Internet sales between 2005 and 2009 citing the presence of an Amazon-owned facility in the state. Other states where Amazon maintains a physical presence but does not collect a sales tax include Arizona, California, Florida, Indiana, Michigan, Nevada, New Jersey, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and Wisconsin. Special exemptions for new Amazon distribution facilities in Tennessee and South Carolina raised significant public opposition given the impact that such special deals would have on Main Street businesses and state budgets in those states.
In California, after the state adopted both the affiliate NY model legislation as well as the expanded nexus definitions, Amazon started the process for a ballot initiative to reverse the new statute. In response, the California legislature undertook compromise legislation under which Amazon would begin collecting sales tax in California by September 2012 or January 2013 if a federal bill is enacted. That legislation, which Amazon ultimately endorsed, was enacted in September 2011, and represents a significant victory for the state and brick-and-mortar retailers and has led to Amazon’s endorsement of a federal solution to this issue. RILA has been vigilant in monitoring and weighing in as appropriate on these state efforts. The recently formed “Alliance for Main Street Fairness” is an Alliance of large and small brick-and-mortar retailers that are actively supporting many of these independent state efforts. Some notable challenges with this state-by-state legislative approach are that Amazon’s response to such bills has been either to sever its relationships with its in-state affiliates in smaller market states, thereby eliminating its liability for sales tax collection, or to take the state to court, as seen in larger market states like New York. Other state efforts similar to Colorado and North Carolina raise privacy concerns regarding government access to consumer data. Despite these challenges, however, state statutes continue to put pressure on pure-play Internet sellers to collect state sales taxes and compete fairly with brick-and-mortar retailers, including RILA members. RILA will continue to take advantage of the negative public perception that these state efforts create for Amazon and other online-only retailers that do not collect state sales taxes, and will continue to drive home the need for federal legislation that can provide a comprehensive solution.
Federal Legislative Efforts
Although the SSUTA went into effect on a voluntary basis in 2005, passage of federal legislation is needed to level the playing field between retailers and to allow states to collect legally owed sales taxes from out-of-state merchants.
In the last Congress, former Rep. Delahunt introduced Main Street Fairness Act (H.R. 5660), /10/ and in the 110th Congress, former Reps. Delahunt and Ray LaHood (R-IL) and Sen. Mike Enzi (R-WY) introduced the Sales Tax Fairness and Simplification Act (H.R. 3396, /11/ S. 34 /12/ ), to give states that have joined the SSUTA the authority to require out-of-state sellers to collect sales tax on remote sales. In the House, this legislation has been referred to the Judiciary Committee, and while in the Senate, it has been referred to the Finance Committee. On November 30, 2011, the House Judiciary Committee held an oversight hearing on the issue.
As a result of the ongoing state activity, there has been a dramatic shift in attention paid to this issue on Capitol Hill, leading to the introduction of the new approach embodied in the Marketplace Equity Act and the Marketplace Fairness Act. Ultimately, federal legislation is the only comprehensive solution for states to have the authority to require out-of-state vendors to collect sales tax. A federal solution is supported by brick-and-mortar and online retailers, retail and real estate associations, publicly and privately owned shopping centers, state government groups, and organizations representing firefighters, teachers, police and other public-sector workers.
For more information, please contact Joe Rinzel, vice president of state government affairs, at joe.rinzel@rila.org, or Bill Hughes, senior vice president of federal government affairs, at bill.hughes@rila.orgAdditional References