Tax Lawyer's Blog

Everybody’s broke.

The taxpayers are broke.

The federal government is broke and getting broker by the minute.

State governments are broke, too.

And many of them have them banded together to do something about it.

The State Lions are Hungry and Internet Sellers are the Limping Wildebeests

BusinessWeek’s Olga Kharif reports in The State of the Internet Sales Tax that,

In the next week, legislators are expected to introduce bills in the House and Senate promising to do away with the “physical presence” requirement. If a bill passes — and that’s a big “if” — it would require all online retailers, except for the tiniest companies, to collect sales taxes in the 23 states that are part of the Streamlined Sales Tax Project. The states would compensate the retailers for the trouble, while promising not to sue them for tax collection mistakes that are made.

Internet retailers are an obvious target for new tax revenue.

But thus far they’ve been protected by a seventeen year old Supreme Court Decision and a very powerful IT industry lobby.

In 1992, the Supreme Court ruled in Quill vs. North Dakota that a state could not force businesses having no physical presence within its borders to collect and remit sales taxes. 

The Quill ruling generally means that an online business can only be required to collect and remit sales taxes in a state in which it has facilities (i.e. a physical presence). 

The Governing Board of the Streamlined Sales Tax Project  (the Board) says that its goal is,

[T]o find solutions for the complexity in state sales tax systems that resulted in the U.S. Supreme Court holding (Bellas Hess v. Illionis and Quill Corp. v. North Dakota) that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state. 

The Court ruled that the existing system was too complicated to impose on a business that did not have a physical presence in the state. 

The Court said Congress has the authority to allow states to require remote sellers to collect tax.

The Board then engages in a little shuck and jive stating that its mission is merely to “reduce the burden of tax compliance:”

The result of this work is the Streamlined Sales and Use Tax Agreement. The purpose of the Agreement is to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance. 

Nowhere does the site mention as one of it’s goals the raising of additional tax revenues!

Orwellian, huh?

Will the Limping Wildebeests Escape?

It’s unclear at this point whether or not the effort to supersede Quill will be successful:

Whether the federal bill passes remains to be seen, but what’s clear is that, as states try to plug holes in their budgets, more and more of them will be re-evaluating whether to charge an Internet tax. [Neal Osten, Federal Affairs Counsel of the National Conference of State Legislatures] says that Florida, Texas, Illinois, Massachusetts, Connecticut, California and Hawaii are considering joining the NCSL push. Were all 50 states to collect these sales taxes, they’d collect an extra $7.5 billion each year, Osten says.

Although opinion is mixed on whether we will have a bill this year, it appears inevitable that internet sales will be subject to sales tax sometime in the near future.

Here’s Minnesota House Representative, Jim Davnie:

Eventually all Web sales have got to be taxed in the same way as those at brick-and-mortar retail stores. After all, past regulation had held off on imposing the tax for fear of crushing the fragile Internet economy that was, back then, still very much in the start-up mode. Now, it’s no longer this fragile baby you are afraid to get crushed.

Pitfalls, Dangers and Obstacles

My concern with any bill that attempts to overturn the Quill physical presence requirement is that if it is not drafted carefully, states might use it to tax out-of-state sales that were previously beyond their reach. 

And when Congress attempts to draft a bill that will allow the taxation of internet sales without expanding a state’s jurisdiction to tax the out-of-state sales of brick and mortar retailers, it runs the risk of over correction and the creation of an unfair and unequal burden on internet businesses.

Related Post:

Senate Bill Requires “Physical Prescence” for State Taxation of E-Commerce

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