Post by valenciajim on Jul 30, 2018 16:09:48 GMT -8
Last June the Supreme Court issued its decision in the case of South Dakota vs. Wayfair, Inc. As has been widely reported, the Supreme Court decided that a state may impose sales tax on sales made by on-line retailers to customers who reside in that state. As a CPA who practiced tax for nearly 45 years, I have been following this issue very closely for the last ten to twelve years.
For those of you who are interested in the wonky side of this issue, the sales tax issues surrounding catalog sales and on-line sales have been resolved by the Supreme Court. For nearly 80 years, Congress has refused to deal with the issue and has let the Supreme Court do the heavy lifting. Based on last week’s Congressional hearings on the issue, I doubt much will change in that regard.
In the earlier cases, the most recent of which was a 1990’s vintage case called Quill vs. North Dakota, the court ruled that imposing sales tax on interstate catalogue sales violated the interstate commerce clause of the constitution. In order for a state to impose sales tax, the seller had to have a physical presence in the state. That meant it had to have a facility in the state, store inventory in the state or have an employee in the state.
In response to these decisions, every state that imposes a sales tax also enacted a use tax. A use tax is paid by the customer and generally equals the amount of sales tax that would have been imposed if the merchant had a physical presence in the state. Use taxes generally do not violate the interstate commerce clause because a state is merely imposing a tax on its own residents. Use tax, of course, is extremely difficult to collect because virtually nobody voluntarily pays use tax.
The Quill case preceded the internet. At the time of Quill, catalog sales were a drop in the bucket compared to the overall amount of sales and catalog merchants posed little if any risk to bricks and mortar merchants or to state sales tax collections.
However, the advent of the internet changed the entire playing field. On-line merchants could easily sell products to out of state customers and frequently enjoy many competitive advantages over their traditional retail competitors. One of those advantages is that they don’t charge sales tax. Consequently, state tax revenues fell considerably.
In a dissenting opinion included in a 2012 Supreme Court decision, Justice Kennedy opined that the Quill decision was obsolete and he would welcome a new case revisiting the issue. As a result, South Dakota changed its sales tax law to require on-line merchants to collect sales tax if they sold more than $100,000 of merchandise to South Dakota annually. (The $100,000 threshold was introduced to provide administrative relief to small Mom and Pop on-line retail businesses.)
South Dakota successfully argued that purchases to customers residing in that state are subject to a consumption tax that can either be collected as sales tax or as use tax. Since sales tax is easily enforced, but use tax is not, South Dakota argued that it was denied due process because it could not use the more efficient sales collection mechanism to collect the tax. It also argued that since the use tax and sales tax were precisely the same amount and since use tax does not violate the interstate commerce clause, asking the merchant to collect the tax also does not violate the interstate commerce clause. These were winning arguments.
Congress held hearings last week about the recent Wayfair decision. Opponents suggested that this was new tax and that the administrative burden placed on the smaller on-line retailers was too great. The Supreme Court addressed the first issue and clearly concluded that this is not a new tax, it merely closes a loophole that allows customers to avoid sales tax by making purchases from on-line merchants.
The second issue was more eloquently addressed by representatives of the Multistate Tax Commission, a body composed of all the state tax authorities. They stated that there are three major companies that have computer databases with software that automates the process of collecting sales tax, remitting the tax to the state tax authorities and filing the requisite sales tax returns. Evidently, after the Wayfair decision there are twenty new companies entering this business, so fee competition for these services is expected to be intense. Furthermore, the Multistate Tax Commission is looking into creating a clearing house with whom on-line retailers can file a single return reporting all on-line sales and can remit the tax to the clearing house in one payment. The clearing house would then settle up with the states. They expect the clearing house to become operational in a couple of years.
Meanwhile, most states are updating their sales tax laws to mirror those of South Dakota.
So what does this mean to model railroaders and others who make on-line purchases?
In the short run, large retailers who sell more than $100,000 of merchandise annually to customers in a particular state will probably start collecting sales tax. It is my understanding that many states are working aggressively to identify those merchants. How effective they will be in this endeavor remains to be seen.
In the model railroad business, a few larger retailers (like perhaps Walthers) probably meet that $100,000 annual sales threshold in several states. They will probably have to start collecting sales tax in multiple jurisdictions. (Walthers used to collect California sales tax on my purchases, but changed their policy a few years ago.) Smaller retailers probably will get a reprieve.
However, once the sales tax collection vendors and the Multistate Tax Commission clearing house are up and running, I suspect that there will be immense pressure to start collecting sales tax from all on-line merchants regardless of their size. From what I have heard, there are proprietary vendors who are developing algorithms to search the internet to identify on-line vendors who are not complying. I am not exactly sure how a state will be able to enforce collection from a vendor who has no physical presence, but I suspect they will figure out a way. Perhaps the state tax authorities will enact some sort of reciprocal collection protocols.
If all of this sounds like Big Brother, well it does. We live in a Brave New World. At some point down the road, we will likely be paying sales tax on our on-line purchases of model railroad stuff.
For those of you who are interested in the wonky side of this issue, the sales tax issues surrounding catalog sales and on-line sales have been resolved by the Supreme Court. For nearly 80 years, Congress has refused to deal with the issue and has let the Supreme Court do the heavy lifting. Based on last week’s Congressional hearings on the issue, I doubt much will change in that regard.
In the earlier cases, the most recent of which was a 1990’s vintage case called Quill vs. North Dakota, the court ruled that imposing sales tax on interstate catalogue sales violated the interstate commerce clause of the constitution. In order for a state to impose sales tax, the seller had to have a physical presence in the state. That meant it had to have a facility in the state, store inventory in the state or have an employee in the state.
In response to these decisions, every state that imposes a sales tax also enacted a use tax. A use tax is paid by the customer and generally equals the amount of sales tax that would have been imposed if the merchant had a physical presence in the state. Use taxes generally do not violate the interstate commerce clause because a state is merely imposing a tax on its own residents. Use tax, of course, is extremely difficult to collect because virtually nobody voluntarily pays use tax.
The Quill case preceded the internet. At the time of Quill, catalog sales were a drop in the bucket compared to the overall amount of sales and catalog merchants posed little if any risk to bricks and mortar merchants or to state sales tax collections.
However, the advent of the internet changed the entire playing field. On-line merchants could easily sell products to out of state customers and frequently enjoy many competitive advantages over their traditional retail competitors. One of those advantages is that they don’t charge sales tax. Consequently, state tax revenues fell considerably.
In a dissenting opinion included in a 2012 Supreme Court decision, Justice Kennedy opined that the Quill decision was obsolete and he would welcome a new case revisiting the issue. As a result, South Dakota changed its sales tax law to require on-line merchants to collect sales tax if they sold more than $100,000 of merchandise to South Dakota annually. (The $100,000 threshold was introduced to provide administrative relief to small Mom and Pop on-line retail businesses.)
South Dakota successfully argued that purchases to customers residing in that state are subject to a consumption tax that can either be collected as sales tax or as use tax. Since sales tax is easily enforced, but use tax is not, South Dakota argued that it was denied due process because it could not use the more efficient sales collection mechanism to collect the tax. It also argued that since the use tax and sales tax were precisely the same amount and since use tax does not violate the interstate commerce clause, asking the merchant to collect the tax also does not violate the interstate commerce clause. These were winning arguments.
Congress held hearings last week about the recent Wayfair decision. Opponents suggested that this was new tax and that the administrative burden placed on the smaller on-line retailers was too great. The Supreme Court addressed the first issue and clearly concluded that this is not a new tax, it merely closes a loophole that allows customers to avoid sales tax by making purchases from on-line merchants.
The second issue was more eloquently addressed by representatives of the Multistate Tax Commission, a body composed of all the state tax authorities. They stated that there are three major companies that have computer databases with software that automates the process of collecting sales tax, remitting the tax to the state tax authorities and filing the requisite sales tax returns. Evidently, after the Wayfair decision there are twenty new companies entering this business, so fee competition for these services is expected to be intense. Furthermore, the Multistate Tax Commission is looking into creating a clearing house with whom on-line retailers can file a single return reporting all on-line sales and can remit the tax to the clearing house in one payment. The clearing house would then settle up with the states. They expect the clearing house to become operational in a couple of years.
Meanwhile, most states are updating their sales tax laws to mirror those of South Dakota.
So what does this mean to model railroaders and others who make on-line purchases?
In the short run, large retailers who sell more than $100,000 of merchandise annually to customers in a particular state will probably start collecting sales tax. It is my understanding that many states are working aggressively to identify those merchants. How effective they will be in this endeavor remains to be seen.
In the model railroad business, a few larger retailers (like perhaps Walthers) probably meet that $100,000 annual sales threshold in several states. They will probably have to start collecting sales tax in multiple jurisdictions. (Walthers used to collect California sales tax on my purchases, but changed their policy a few years ago.) Smaller retailers probably will get a reprieve.
However, once the sales tax collection vendors and the Multistate Tax Commission clearing house are up and running, I suspect that there will be immense pressure to start collecting sales tax from all on-line merchants regardless of their size. From what I have heard, there are proprietary vendors who are developing algorithms to search the internet to identify on-line vendors who are not complying. I am not exactly sure how a state will be able to enforce collection from a vendor who has no physical presence, but I suspect they will figure out a way. Perhaps the state tax authorities will enact some sort of reciprocal collection protocols.
If all of this sounds like Big Brother, well it does. We live in a Brave New World. At some point down the road, we will likely be paying sales tax on our on-line purchases of model railroad stuff.
