Consumers are used to paying sales taxes in their local stores. Within the past few years, many started paying taxes on items bought online as well.
The collection of sales tax on e-commerce purchases is referred to “economic nexus.” According to payment firm Stripe, the term economic nexus “refers to a business presence in a US state that makes an out-of-state seller liable to collect sales tax there once a set level of transactions or sales activity is met.”
Sales taxes are generally a state tax, though some counties and cities impose additional sales tax levies. Each state sets its own laws and rules around sales taxes.
When it comes to e-commerce, though, sales taxes have been problematic. With no physical presence in states, many online sellers simply did not collect sales taxes. But that changed in 2018 when the U.S. Supreme Court rule in favor of South Dakota in a case against Wayfair.
The case overturned previous Supreme Court decisions in both National Bellas Hess v. Department of Revenue of Illinois in 1967, in which the court decided a mail-order reseller was not required to collect sales taxes if it had no physical presence in the state, and the more recent Quill v. North Dakota in 1992, in which the court reaffirmed its previous position in the digital age.
Sales tax door opens
The Supreme Court’s decision in South Dakota v. Wayfair Inc. was specific to that case, but it opened the door for states to start requiring online sellers to collect sales taxes and pay states what they deemed to be their fair share.
In an interview with FreightWaves at the time, Aaron Ahlburn, managing director and director of research for the industrial property sector for JLL’s Americas region, said the ruling created some clarity for sellers.
“It clears the air, but it doesn’t necessarily answer all the questions yet. States are enacting policies, but what is the next level of legislation?” Ahlburn said.
Today, 45 states and the District of Columbia have internet sales tax regulations. Only Alaska, Delaware, New Hampshire, Montana and Oregon do not. Each state that does require collection of taxes on internet sales has a different threshold of dollar amounts and/or transaction volumes that trigger economic nexus in that state. The result is that online sellers must track this data and in some cases, may suddenly face a tax bill later in the year if sales take off in a single state.
GAO weighs in
That may be changing. The Government Accountability Office (GAO) last week recommended that Congress enact sales tax regulations for all 50 states and the District of Columbia, standardizing the figure.
Saying that Congress is responsible for interstate commerce, and e-commerce is the definition of interstate commerce, the GAO stated that Washington politicians should work with states to “establish nationwide parameters for state taxation of remote sales.”
“Such parameters should balance state interests with the need to address multistate complexities. The parameters should improve the overall system’s alignment with the criteria for a good tax system and help address existing uncertainties regarding what remote sales taxation is legally permissible by states and localities,” GAO wrote in its recommendations.
GAO said that fundamental tax policies are guided by two basic principles: to raise sufficient revenue to fund government spending and to do so in a way that provides equity, economic efficiency and a combination of simplicity, transparency and administrability.
“In the more than 4 years since the Wayfair decision, concerns have been raised regarding the extent to which the overall remote sales tax system aligns with these criteria,” the agency wrote.
Patchwork of rules adds cost
In studying the issue, GAO estimates that 2021 nationwide remote sales tax collections were approximately $30 billion. Businesses incurred software costs to manage multistate tax collection capabilities as well as audit and assessment costs to comply with individual state regulations.
The agency added that the current patchwork of rules failed several of the criteria good tax policy should follow.
For example, “GAO found that post-Wayfair multistate sellers must grapple with the patchwork of different requirements across the taxing jurisdictions with which they have economic nexus, whereas brick-and-mortar sellers generally must grapple only with the requirements of the jurisdictions in which they are physically located, regardless of the states in which their customers live.”
It also noted that it found some sellers had diverted resources away from certain states to ensure they did not trigger economic nexus in that state, and that the variety of regulations simply made it difficult for businesses to reasonably comply.
“While the right of states to levy taxes, and to empower their localities to do the same, is a well-founded principle of state sovereignty, under the Constitution’s Commerce Clause, Congress has the authority to regulate interstate commerce. The Supreme Court has stated that Congress has the ‘ultimate power to resolve’ issues with taxation of remote sales. Federal legislation which puts nationwide parameters in place for state taxation of remote sales could help address the uncertainties and multistate complexities and improve the overall system,” GAO wrote.