Initial reports indicate that the Monday after Thanksgiving, known as “Cyber Monday” was the biggest online shopping day in history. According to comScore Inc, online sales rose 22 percent over last year to $1.25 billion. According to IBM Benchmark, the average Cyber Monday order grew 2.6 percent to $193.24. The percent of online shoppers who used a mobile device went up threefold to 6.6 percent. Though this is just one day, it is easy to see that Americans are growing more and more comfortable with Internet shopping. But changes may be coming.
Online purchases are not exempt from sales and use tax
A common misconception is that goods purchased over the internet are exempt from state and local taxes. This assessment is incorrect. Similar to store bought purchases where the buyer generally sees a line added for “Sales Tax,” officially the state revenue laws include a “Sales and Use Tax” where the term “use” refers to the obligation of the buyer to pay taxes on out of state purchases which are used in Georgia (to see the policy and forms for the use tax, please see: https://etax.dor.ga.gov/pressrel/Use_Tax_Press_Release.pdf). The issue is not whether there is a tax liability but rather who is responsible for remitting the tax to the state.
The confusion stems from the 1992 Supreme Court ruling “Quinn vs. North Dakota” which held that retailers do not have to collect sales taxes in states where they do not have a physical presence (known as a “substantial nexus”). This was prior to widespread adoption of the Internet and was targeted at mail and phone order companies. The basis of the ruling was that only the federal government had the ability to require retailers to collect the taxes across state lines. But states still have the ability to assess residents the use tax on goods purchased out of state as is done in the case of auto sales today.
States and Feds look at increasing compliance
As you can guess, states have not seen much luck in compliance with use tax reporting. The National Conference of State Legislators estimates that states will lose a combined $23.3 billion in FY2012 in uncollected use taxes. Georgia is estimated to lose $837.6 million in state and local sales taxes.
The increase in e-commerce and lagging state revenues has led states to explore ways to push the limits of the Supreme Court decision. Many small businesses use Amazon (and other sites like eBay) to handle their transactions. California passed a law arguing that these local affiliates meet the physical presence requirement and thus the online retailer must collect taxes. After much contention, Amazon agreed to collect the tax starting in September 2012. Florida, Connecticut, Tennessee, Indiana, South Carolina and other states are also pursuing this strategy. Georgia may well follow suit.
Concern about varying state and local regulations has led Amazon.com (the largest online retailer with $34 billion in annual revenue) to support the federal “Marketplace Fairness Act” introduced by Sens. Richard Durbin, Lamar Alexander and seven other senators.
This bill would require the collection of use taxes whether the retailer has a presence in the state or not. A state would have to conform to the Streamline Sales and Use Tax Agreement which requires states to make their sales tax rules and definitions uniform (Georgia and 43 other states already participate in this agreement). The legislation would however, exempt online retailers with less than $500,000 in annual revenue from the collection requirement. Amazon.com “strongly supports the measure” so long as few companies can duck the requirements. This is important because, according to Amazon VP Paul Misener, only 1 percent of online retailers sell more than $150,000 per year. Ebay, though opposes the measure because they fear it will make small Internet retailers less competitive against large retailers.
In addition to the state and local governments, brick and mortar retailers will gain from the Marketplace Fairness Act. The current inclusion of sales and use taxes results in a competitive disadvantage for them. What has changed the debate somewhat has been the involvement of chains such as WalMart and Target who see growing internet sales eating into their sales.
The handwriting is on the wall, and companies like Amazon are coming to the conclusion that it is better to work with states rather than oppose them. As online sales increase, it will be important to create a balance of the administrative requirements placed on e-commerce retailers with the legal taxes owed to states.
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