By Jessica Whitman | Download as PDF. States are losing hundreds of millions of dollars in revenue and local businesses are suffering from a competitive disadvantage due to the prohibition against requiring out-of-state vendors to collect and remit sales and use tax on purchases by in-state residents. The proliferation of the Internet has caused an explosion in online shopping and the sales tax loophole for online purchases means brick and mortar stores are at a competitive disadvantage. There is growing debate on the state and federal levels on what to do. The Streamlined Sales and Use Tax Agreement is the best solution.
The problem requires immediate attention in these times of growing budget deficits and sharp cuts in funding to critical public services such as education and health care. Additionally, online vendors are able to offer goods for lower prices than brick and mortars because they do not charge the tax. In light of this competitive disadvantage, local brick and mortar stores dutifully collecting taxes from their customers struggle for business.
Forty-five states and the District of Columbia, including Massachusetts, levy a “sales” tax on in-state purchases. All of them also impose a “use” tax on residents who make purchases from out-of-state vendors. The use tax is designed to limit the loss of sales tax revenue from out-of-state purchases and to protect local stores from the loss of business to vendors in other states with lower or no sales tax. But the system is not working as envisioned.
The sales tax is collected by the vendor at the point of sale and turned over to the state. The use tax, however, is the responsibility of the purchaser. The use tax is ineffective because it relies on consumers making voluntary payment, without any apparent enforcement mechanism. This is causing states to forgo millions of dollars annually in uncollected revenue.
The reason states are unable to enforce collection of sales and use tax on online and mail order purchases is the 1992 United States Supreme Court case, Quill v. North Dakota. Quill held that the Constitution’s commerce clause prevents a state from requiring out-of-state vendors with no physical presence in a state to collect sales and use tax. The court held that the requisite “nexus” is not established in such cases and that only Congress may grant states the authority to require remote vendors to collect and remit the tax.
Congress has failed to act, prompting several states to take matters into their own hands. Some states have enacted so-called “Amazon tax” laws, a reference to the online retail giant Amazon.com. Amazon tax laws amend a state’s tax code to establish nexus where an out-of-state vendor uses a third party affiliate in the state to solicit business. Many online retailers utilize such affiliates to advertise and direct traffic to their websites. This approach enables states to require out-of-state vendors to collect the tax if they employ affiliates located in that state.
Amazon tax laws face significant opposition from both online retailers, such as Amazon.com, and local affiliates, which are usually small businesses. Amazon.com has spent considerable money lobbying to prevent states from passing this sort of legislation. Amazon.com and other online retailers have also threatened to remove jobs from states that enact such laws. Many states are reluctant to take on such battles, especially in a down economy.
Other states have joined together to suggest a nationwide solution to Congress. The uniform “Streamlined Sales and Use Tax Agreement” (SSUTA) may be independently adopted by each state but relies on Federal enabling legislation to be effective. Twenty-four states have adopted the SSUTA, which amends member states’ tax codes to create a uniform sales and use tax system. Federal legislation would grant the authority to states to require tax collection.
This Congressional action is the appropriate solution for the online sales tax problem. It would allow states to simplify and streamline the sales and use tax system on a national scale. While federal legislation must pass to conclusively end the problem, states should act now by passing SSUTA legislation to encourage Congressional action and to prepare for future implementation.
It’s time for Massachusetts to get on board.
Jessica Whitman is completing her final year at Suffolk University Law School while working for the Joint Committee on Revenue in the Massachusetts legislature. She received her B.A. in Political Science from Union College in Schenectady, New York in 2007. Jessica is particularly interested in tax policy and reform.