Although the Recent Marketplace Fairness Act is No Longer – Similar Remote Seller Collection Proposals Are in the Wings
As online sales continue to chip away at brick-and-mortar retail sales, states have come under increasing pressure to tax online interstate commerce. For nearly 20 years, Congress has considered various proposals to simplify state tax codes while granting states the authority to tax sales made by vendors that lack a physical presence within their borders. These proposals have generally exempted small vendors and provided basic rules for determining which state is allowed to impose the tax. The most recent iteration of these proposals, the Marketplace Fairness Act, died in the House when the 113th Congress adjourned, but similar proposals are expected to be introduced in 2015.
More than a decade's worth of congressional gridlock over how collection authority over remote sellers should work has yielded a patchwork of highly contested state laws, as local governments look to “take what’s theirs.” For online businesses serving customers across state boundaries, the potential impact of the federal remote seller collection authority and Congress's failure to pass national tax reform both present significant operational challenges.
Legislation Triggers More Questions than Answers
While the remote seller collection authority would deliver major benefits to cash-strapped governments and overburdened businesses alike, a number of hurdles impede its adoption. One of the remote seller collection authority’s biggest sticking points is the dispute over origin-based and destination-based taxation.
Some online businesses (particularly those with few or no distribution facilities and physical storefronts) argue that origin-based taxation is the more palatable option because it allows them to establish headquarters in states that do not impose a sales tax. Others counter that destination-based taxation would be more equitable because it is based on where the customer resides.
If congressional leaders manage to resolve their differences and the federal remote seller collection authority becomes law, businesses can expect states to begin simplifying their tax codes and adopting more uniform sales tax definitions as a prerequisite to interstate taxation. While simplicity is the long-term goal, any regulatory transition would likely cause temporary chaos.
States Pursue “Self-Help” Solutions
As the debate over the federal remote seller collection authority shuffles along, many states are forging ahead, enacting laws to tap into interstate commerce revenues. To date, 14 states have enacted “click-through nexus” laws that broaden the definition of “nexus” beyond the physical presence requirement outlined in the precedent-setting Quill Corp v. North Dakota. These statutes grant states the authority to tax out-of-state businesses if an in-state source refers customers to their websites (for example, through affiliate marketing links.)
The constitutionality of these laws is unclear and has been challenged in the courts with mixed success. Consequently, businesses face a patchwork of state laws and no federal tax standard, resulting in heightened risk and greater costs of compliance. As more states adopt individual approaches, remote vendors must tread lightly: a failure to pay interstate taxes when required could be costly, but firms are also vulnerable to class-action customer lawsuits for collecting sales tax when not mandated.
Outside of the U.S., other countries are achieving real progress with modernized tax regulations. On January 1, the European Union adopted a new approach for administering and sourcing its value-added tax (VAT), which uses a destination-based system for determining which jurisdiction’s tax applies to sales of certain digital services. The updated VAT not only addresses the needs of an increasingly digital economy, but does so with more uniformity and simplicity than the U.S. system for collecting sales tax. Given the current congressional environment, however, the feasibility of approving similar tax policy in the U.S. is unlikely.
Navigating Around an Uncertain Regulatory Environment
As other countries refine their taxation strategies to meet the challenges of an Internet-driven world, the U.S. is falling behind and struggling to adapt to the new normal of digital commerce. But despite the remote seller collection authority’s bleak outlook, businesses must be prepared to navigate around the obstacles presented by an uneven and uncertain regulatory environment.
While each state rolls out its own remedy to the interstate taxation dilemma – from Colorado’s contentious requirement to provide itemized reports on customer purchases, to New York’s adoption of “click-through nexus” – organizations must carefully determine where they're required to collect sales tax. Without federal guidance on corporate interstate tax obligations, online retailers must be more vigilant about compliance — and equipped with the internal resources to do so.