“Supreme Court Widens Reach of Sales Tax for Online Retailers” (nytimes):
Overstock said the decision would have little impact on its business but argued that with more than 12,000 different state and local taxing districts, the ruling would present a “compliance challenge” for internet start-ups. Chief Justice Roberts made a similar argument in his dissent.
Folks on Facebook discussing this seem to assume that there are roughly 50 sales tax jurisdictions in the U.S. so a retailer need only do a simple calculation and write at most 50 checks per quarter to remit the sales tax actually collected. The reality is that up to 12,000 different checks would need to be written on a quarterly basis, e.g., after a sale to a single customer 3,000 miles away the retailer would have to do the following:
- figure out the city in which the customer lived (zip codes may span multiple cities)
- figure out the county in which the customer lived (zip codes may span multiple counties)
- run three multiplications involving state, city, and county tax rates (this is the easiest part!)
- write a check to the state
- write a check to the city
- write a check to the county
There are software packages designed to help with this (see Avalara, for example) and obviously buying stock in this kind of bureaucracy-on-top-of-bureaucracy enterprise would have made sense a month ago! But I wonder if the increased regulatory burden creates opportunities for new companies that can make life simpler for a retailer.
(Separately, I think that this shows one of the strengths of the European way of doing things. A retailer would have to deal with only a single VAT authority for both calculation and remittance. A friend pointed out that the true religion of the U.S. is regulatory compliance, in the sense that all of the time people used to spend praying in churches in the Middle Ages is now devoted to filling out forms, conducting training seminars, etc. This could be an example? Where the European deals with 1 sales taxing jurisdiction, the American will deal with 12,000.)
Readers: What do you think of all of this? Does it make sense to have a national sales tax policy enforced by 12,000 different entities? Does it make sense in the first place to tax a retailer in Hawaii selling to a consumer in New York City? The Hawaiian store is not getting any services from New York State or New York City. If “sales tax” is actually supposed to be a consumption tax on the consumer, wouldn’t it make more sense to impose the tax globally rather than nationally? Why not have the government mine a citizen’s or resident’s credit card statements and tax everything purchased anywhere on Planet Earth? If it is a consumption tax, what’s special about consuming from Hawaii or while sitting in New York as opposed to consuming something in France?
Given that people need to give information to receive the goods, as long as the web portal can calculate the local sale tax, the only issue is keeping track of which authorities need paying, and how much. I presume one of these new things, we call them ‘computers’, could solve these issues, all in a couple of days, or even faster!
Perhaps the internet experts should read this before they solve this problem in a couple of days. http://www.coyoteblog.com/coyote_blog/2018/06/the-sales-tax-problem-for-small-businesses.html
Phil isn’t the real money to be made in writing software for the different jurisdictions to collect the tax and penalties? Plus interest of course.
Federico: Yes, the computer and software can track all of this. But the cost still becomes unbearable. For example, you (I presume you are not in Dallas) make a sale of $100.00 in Dallas from your garage based business. You now need a Texas Sales Tax account number. You will then complete the form and send your $8.25 to the State of Texas. Thankfully here you don’t have to remit the state 6.25% to the state, the 1% to the city and the 1% to Dallas Area Rapid Transit separately. In other locations you do have to write three checks. This is for one sale. But now you have an account and you have to file the report every month for the rest of the time you are in business. Even with $0 in sales from Dallas or Texas. Multiply this by Phil’s 12,000 figure.
You also won’t be allowed the occasional sale exemption. This is the exemption that works for things like garage or yard sales (no more than 3/year or you are in the yard sale business and need to file sales tax reports). You are a retail business with a presence on the web that I can see from Dallas, Texas.
[Related Aside: I once, while working at a small community bank, repossessed and airplane and sold it to another party. We subsequently faced a sales tax audit at the bank. I didn’t charge or collect sales tax on the sale of the airplane. The sales tax auditor said we owed the tax. I tried the occasional sale exemption on her, since we were not in the airplane business. Nice try, she said. You, the bank, are retailers of repossessed property.]
This is a really horrible decision. It is not fair for the retailers with physical presence in South Dakota (those auditors can find a retail location) to face competition that is not located in the state that doesn’t pay sales tax. It is also a terrible burden to put on web sites for specialty shops run out of the garage. But this was a problem the needed to be fixed in Congress.
That said, I wonder what actual enforcement will be like? If I’m here in Dallas selling three of four specialized widgets into South Dakota per year, how is South Dakota going to come after me? There is a threshold below which this won’t matter.
Finally, Sales Tax is collected and remitted by the retailer, while the burden of the actual tax falls on the customer. In the case of the airplane mentioned above. I was able to go back to the purchaser to collect the tax. The law, statue and case, gives the retailer the authority to demand and collect sales tax that was due. Every tax authority has a way to self report and pay use/sales taxes on untaxed purchases. They have to be one of the least used forms ever created.
The big states like California could adopt a single rate for out-of-state internet and mail order sales, and a single office to process payments. The smaller states could contract with clearing houses to accept payments. If the state governments were reasonable, the tax would not be a large burden.
Is that likely? I doubt it.
When Amazon started collecting sales tax, I figured that *they* had figured out that the writing was on the wall and were going to go after first-mover advantages in this particular game of regulatory capture. So I went to the the vendor association for the sales tax collection software industry to see whom I could invest in to bet on Amazon’s intelligence. Avalera was a member, but at the time, the only publicly traded member was ADP, for whom this is very small piece of business. Nonetheless, I placed my bet and ADP beat the market for me as long as I held their stock. (I sold it years ago when I moved to a robo-advisor managed portfolio. I haven’t followed this since so I don’t know if there was more availability of exposure to this market leading up to the Supremes’ decision or not.
I dont find any of this persuasive.
>> The Hawaiian store is not getting any services from New York
The store is not paying the tax. The consumer, in NY, is.
>> You also won’t be allowed the occasional sale exemption.
If I recall correctly, the law in the current case allowed for a 200 transaction or $100,000 exemption.
> complications paying the tax
In principle this is solvable for a fraction of a penny per transaction. In practice we are not there yet. But I am not convinced it would be hard for someone or several competing entities to provide this service. Exxon for instance probably has a station in every different taxing location, and they sell a wide variety of categories. How hard would it be for them to set up a service where they take care of it. Or for the states to set up the service.
Well i am certainly not in favor of paying any more in taxes to anyone for any reason but the original idea behind the federal government was that the states as in effect independent countries gave up some of their sovereignty to the federal government in return for perceived benefits. They did not give up their right to levy taxes. So i don’t know that whether the current tax system, where lots of jurisdictions have the right to levy taxes, makes sense or not is really the issue. I suppose some states might decide not to tax internet transactions and sellers could restrict their sales to those states – like Florida and Texas etc. don’t tax personal income at the state level and some people therefore decide to live in those states for that reason.
The technical problem of collecting taxes seems inefficient (as others have mentioned, services are available for a fee), but favoring distant large companies over local businesses is probably not pushing the economy in the right direction.
Centralizing to the state or the federal level would simplify things but would yet again favor the rural and unproductive areas that are overrepresented at those levels. These sales tax overlays fund local services, as they are typically one of the few tax levers available to municipalities. For example, Seattle’s subway system expansion relies heavily on the sales tax, and each time they have to beg the state legislature for permission to tax themselves (the state contributes nothing itself despite paying for roads through sparsely populated areas).
As an aside, many of the same complications show up for the state income tax, though it is the taxpayer who has to sort it all out. It’s not so complex if you live and work in one state, but a number of metro area cross state lines.
wally: “The store is not paying the tax. The consumer, in NY, is.”
This point of view (sales tax as consumption tax on individuals) makes sense… until you think about the fact that there is no NY sales tax collected when a NY resident spends money outside of NY. If the purpose is taxing consumption, why wouldn’t NY collect tax on purchases made in tax-free states, such as New Hampshire, or in countries other than the U.S.?
If you think about it, maybe the answer is that the government already tracks income pretty well via W-2 and 1099. The government also tracks most savings. So the government could simply take the difference between after-(income)-tax income and new savings and say “this is what we think you’ve consumed” and then tax that at 0-10%, depending on residential address. Then merchants don’t have to be hassled and all spending, including under-the-table cash (e.g., to a nanny who wants to keep her public housing, Medicaid, and food stamp entitlements) and international, is taxed.
The situation is far worse than you describe. In New Jersey, yarn used for art projects is taxed at a higher rate than yarn used for knitting sweaters.
My gut sense is that this is great news for Amazon, who by this point probably has a fairly robust tax engine very well integrated into its distribution system, giving small sellers one more reason to drink from the poisoned chalice of Mr. Bezos’s platform.
I haven’t read any good legal analyses of this decision yet. So far, what I’ve seen suggests that the court simply felt like times had changed, and thought it was time to revisit Quill, but nothing beyond that. Since the court likely won’t speak again on this for some time, we’re stuck with hoping that Congress will step in to make sure that this doesn’t create a crushing compliance burden for tiny businesses.
Otherwise known as the “Might as well just sell through Amazon act of
2018”. What a terrible result for small businesses.
Also, I wonder what the worst that can happen if you decide not to comply is? Will the city of San Francisco take you to court? Will there be selective enforcement against the “wrong” sorts of businesses?
Philg: point of fact — New York state expects to be paid sales tax on goods bought outside of New York that will be used by residents in the state. This is on line 59 on form IT-201 and explained in detail in the instructions document available at https://www.tax.ny.gov/pdf/current_forms/it/it201i.pdf
To partially quote:
/citation
Line 59 – Sales or use tax
Report your sales or use tax liability on this line.
You owe sales or compensating use tax if you:
• purchased an item or service subject to tax that is delivered to you in New York State without payment of New York State and local tax to the seller; or
• purchased an item or service outside New York State that is subject to tax in New York State (and you were a resident of New York State at the time of purchase) with subsequent use in New York State. Note: You may be entitled to a credit for sales tax paid to another state.
[…]
Example 2: You purchased a book on a trip to New Hampshire that you brought back to your residence in Nassau County, New York, for use there.
You may also owe an additional local tax if you use property or services in another locality in New York State, other than the locality to which you paid tax. You owe use tax to the second locality if you were a resident of that locality at the time of the purchase, and its rate of tax is higher than the rate of tax originally paid.
Failure to pay sales or use tax may result in the imposition of penalty and interest. The Tax Department conducts routine audits based on information received from third parties, including the U.S. Customs Service and other states.
/citation
…
It pains me that my fellow citizens happily submit to this obnoxious tyranny.
@mememe California has this too, although I don’t think anyone actually pays it. I’ve heard the state will go after you for stuff like cars, airplanes, and yachts bought in zero-sales-tax Oregon, but I’ve never heard of them trying to go after you for small stuff.
@supermike,
I agree, that in practice, these silly laws and regulations are more observed in the breach thereof. It is this selective enforcement and observance of overly complex and intrusive laws that compromises the effective rule of law. We turn ourselves into a nation of cunning scofflaws.
The laws, especially tax laws, must be concise and understandable for them to be effective. It is our reliance on automated computation that has worsened the problem. Nobody is actually thinking these things through intelligently, but just adding rules and expecting the computers to ‘figure it out’. Hence the increasing prominence of Finance, Insurance, and Real Estate in our national economy. Nobody wants more of these things, but they grow like cancers, and eat up healthy tissue in the process.
I sign off with the gospel according to Matthew Broderick, via Wargames:
https://youtu.be/gWo8zSlKUAI
“A strange game. The only winning move is not to play.”
>but I’ve never heard of them trying to go after you for small stuff.
and yet the official example given is the buying of a book in New Hampshire that is read on Long Island.
@mememe which is crazy because who is to say where you read it, or if you gave it away. The big ticket items are the sort that need to be registered (or maybe installed), leaving some kind of traceable paper trail. I guess the theory is that since Amazon can do it, even the small transactions now leave enough of a paper trail to dump this on the vendors. The article I read suggested that the states will be expected to simplify things for out of state vendors, but I’ll believe that when I see it.
even the small transactions now leave enough of a paper trail to dump this on the vendors
There will be some perverse effects unless this is straightened out.
Right now I see the advantageous business model is to only operate out of a garage or small warehouse. You would have absolutely no retail sales in your home state. All product is shipped out of state. You don’t have to register and pay sales taxes in your home state. Your home state will never find you. And if they do, you’ll be clean and be able to withstand audit. Other states will have no way to find you.
Now if your home state starts to cooperate with other states… Well that will become a problem.
Hmm… Maybe set up a business with a P.O. box in Thackerville, OK. Get a bank account there. Incorporate in OK and still just run the business out of my garage in Dallas.
Shhh… Don’t tell anyone.
@Mememe
NJ has the same law, but no one follows it.