Baker Institute expert: Growing interest among states to tax remote online sales

Online retail giant Amazon recently announced that it would voluntarily start collecting sales taxes in four additional states — Hawaii, Idaho, Maine and New Mexico — making the company a nationwide state sales tax collector. The move comes at a time of growing interest among states in taxation of remote online sales as a potential source of revenue, according to an expert at Rice University’s Baker Institute for Public Policy.

Credit: Shutterstock.com/Rice University

Joyce Beebe, fellow in public finance, outlined her insights in a new issue brief, “E-Commerce: Recent Developments in State Taxation of Online Sales.” She discusses state and federal legislation aimed at granting states greater authority to collect sales taxes on remote online sales as well as obstacles to those efforts.

E-commerce sales have been growing at a rapid rate over the last decade. Sales in 2015 were estimated to be $6.6 trillion in the manufacturing, wholesale, retail and service sectors, according to the U.S. Census Bureau. On the flip side, over the last four decades, the aggregate sales tax base across all states has contracted, creating financial issues for states that rely heavily on sales taxes.

Any discussion of online sales tax would not be complete without mentioning the Quill decision, Beebe said. In 1992, the U.S. Supreme Court ruling in Quill Corp. versus North Dakota precluded states from imposing a sales tax collection obligation on remote retailers that do not have a physical presence in the state. In other words, nexus (Latin for “bind” or “tie”), the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state, arises only when the vendor has a physical presence in a state. In addition to establishing the physical presence rule, the Supreme Court also noted that Congress has the power under the Commerce Clause of the U.S. Constitution to overrule this decision legislatively.

“All four parties — states, the U.S. Supreme Court, Congress and merchants — involved in the online sales tax discussion have large interests at stake. Many states continue to face budget shortfalls, and the fiscal reality prompts these states to target online sales tax to meet revenue needs,” Beebe wrote. “The U.S. Supreme Court has previously indicated the potential need to revisit Quill. However, it has turned down multiple cases in part to avoid legislating from the bench. Congress has the power to resolve the issue, and some states hope that Congress will mandate a solution to end this prolonged legal battle. Finally, the merchants, both online and traditional ones, have distinct positions on this issue.”

Looking at what might happen next, Beebe said that one possibility is that Congress may reach an agreement before any case reaches the Supreme Court. “Any congressional agreement that would grant states the authority to tax remote sales would also involve simplifications in state sales tax systems and enhanced coordination across states, which would alleviate compliance burdens,” Beebe wrote. “However, Congress has many other major proposals on its plate, such as an overhaul of the tax code and a repeal and replacement of the Affordable Care Act, which may prevent any online sales tax agreement from being formulated in 2017.”

Beebe said another possibility is that the Supreme Court accepts a case for review and ultimately makes a decision modifying Quill. However, if the Supreme Court simply rules that Quill is unconstitutional, it still is not immediately clear how online retailers are going to be taxed and whether Congress is going to take action at that point, she said. On the other hand, if the court upholds Quill, states may continue to pursue other creative extensions of the sales tax nexus or impose reporting requirements as in the Colorado law, she said.

“States will either continue to push for the ability to tax remote sellers, mandate that noncollecting remote vendors report buyers’ purchases to the states, encourage online merchants to voluntarily collect and remit sales taxes to the states or even start asking the third-party merchants who use other sellers’ online marketplace platforms to pay sales taxes,” Beebe wrote. “Some will be successful, while others will keep state courts busy.”

Beebe noted that at the time the issue brief was being drafted, Amazon announced its acquisition of Whole Foods Market June 16. “Although the final corporate structure is unclear at this point, this may potentially create nexus for Amazon in more states,” Beebe wrote.