Multi-State – Proposed Online Sales Tax Legislation

SALT Report 3863 – The Census Bureau of the Department of Commerce estimates that U.S. retail e-commerce sales for the second quarter of 2016, adjusted for seasonal variation, hit a whopping $97.3 billion. Since many online retailers aren’t collecting sales tax – either because they’re not required to or they choose not to – states are losing millions of dollars in sales tax revenue each year. That may be changing soon – if Congress can agree on a plan.

Under current law, companies which make sales online are still subject to the same sales tax collection requirements as so-called “brick and mortar” stores. The test is whether the company has a physical presence in that state (though physical presence is a bit subjective, depending on who is asking). If a company has a physical presence in a state, they are required to collect and remit sales taxes.

Even if a company doesn’t charge sales tax, that doesn’t necessarily mean that consumers get a pass. Many states impose a “use tax” which is the consumer’s version of the sales tax. If a state has a use tax and a consumer is not charged a sales tax, taxpayers are supposed to self-report and pay the tax. Almost half of the states offer a line on their income tax returns now for this purpose; otherwise, there are separate tax forms for completion. As you can imagine, between the complexity and the insanity of this rule, most consumers ignore it.

A number of proposals have been floated by Congress in an attempt to resolve some of the confusion and perceived inequities that currently exist. In 2014, then Speaker of the House John Boehner (R-OH) signaled that he would not support the Main Street Fairness Act (MSFA), a bill that would allow state and local governments to collect sales tax on internet sales. The general idea of the MSFA was to simplify the administration of sales and use taxes. Under the terms of the Act, Congress would have authorized the Streamlined Sales and Use Tax Agreement, a multistate agreement which was adopted on November 12, 2002.

The proposal didn’t get anywhere. Ditto for a version of the Online Sales Simplification Act (OSSA) initiated in 2015 by Judiciary Committee Chair Bob Goodlatte (R-VA).

Chair Goodlatte, however, isn’t giving up. He recently circulated a new version of OSSA which some online retailers, like eBay, are watching closely.

The OSSA proposal tries to address some important issues by first defining where the tax should be imposed – that’s been a sore spot in previous attempts at simplifying the tax.

The proposal has received some early praise for addressing cost and complexity burdens which were offloaded onto online retailers in prior internet sales tax efforts. However, critics suggest that pushing states into a streamlined version of an internet tax undermines state sovereignty. Expect both of those issues to be part of broader discussions should the proposal gather steam.

You can read the Online Sales Simplification Act of 2016 draft here (downloads as a pdf).

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