ACMA’s Remote Sales Tax Collection Work
Since 2013, the ACMA has been active in trying to bring about a fair means of enabling all sales tax collecting states to collect in a fair and reasonable way from remote merchants doing business in such states. From 2013 until the 2018 United States Supreme Court’s overturning of the Quill precedent in South Dakota v. Wayfair, the ACMA led a coalition called True Simplification of Taxation, which effectively held off a Goliath-like onslaught to overturn Quill.
Ultimately losing the Wayfair case by a 5-4 vote, the ACMA abruptly shifted gears in an effort to make sales tax collection an easy and relatively inexpensive endeavor. On this website, we lay out all the issues involved and ACMA’s stance. Links to relevant documents, news articles, and the like appear below each section under “resources.”
On June 21, 2018, the Supreme Court overturned decades of precedent with its decision in South Dakota v. Wayfair. States could now extend requirements for collecting and remitting sales and use taxes to sellers with no physical presence within the state’s borders (aka: “remote sellers”). Writing for the majority, Justice Anthony Kennedy suggested that the following considerations would make a remote seller sales tax law Constitutionally valid:
- An exclusion for “those who transact only limited business” in the state.
- No retroactive collection.
- Single state-level administration of all sales taxes in the state.
- Uniform definitions of products and services.
- A simplified tax rate structure.
- Access to sales tax administration software provided by the state.
- Immunity for sellers who use the software provided, absolving them from liability for errors derived from relying on it.
Since the 2018 ruling, those considerations have been – at best – only partially and haphazardly met. The ACMA’s position is that the resulting system is unfair, unworkable and presents an undue burden to commerce across state lines, and it can only be fixed by Congressional action.
- Supreme Court Ruling in South Dakota v. Wayfair – June 2018
- Colony Brands’ Brief in Internet Sales Tax Case – April 2018
- Taxpayer Group Files Amicus Brief in Internet Sales Tax Case – April 2018
- Wayfair Respondents Brief in Internet Sales Tax Case – March 2018
Complying with sales tax regulations across state lines is a daunting task. As of October 1, 2020, there are close to 16,000 state, local and special district sales tax jurisdictions across the US. Michigan has one; Missouri’s Department of Revenue lists 2,427 total jurisdictions, though “only” 1,729 impose a unique sales tax.
Each jurisdiction has its own rates, definitions of what is taxable, reporting and filing requirements, audit procedures and penalties. If that was not enough, these are always changing. For instance, in just the first six calendar months of 2020 there were 327 total new county/city/district sales tax rates, or changes to existing rates, across the US. Many states provide one point of entry for remote sellers to register; however, some of the states with the most taxing jurisdictions, such as Alabama and Colorado, require remote retailers to register with individual local home rule jurisdictions or their agents.
Of the 38 states with multiple sales tax jurisdictions, only three (so far) have made any effort to provide a simplified tax rate structure for remote sellers. In Alabama and Louisiana, the simplified rates are only available to sellers that do not meet the economic nexus thresholds but are collecting and remitting voluntarily. Thus, in practice, Texas is the only state to have a simplified local jurisdiction rate for remote sellers. Click here to view a US chart showing each state’s count of jurisdictions.
There is little to no uniformity across the country in what goods and services are taxable. For instance, delivery charges (“freight”) may be fully taxable, or…
- taxable on only the portion of the shipment that is taxable
- taxable only if the charge is not invoiced separately
- or not taxed if delivered by common carrier and/or USPS
A live tomato plant may be taxed as food in one jurisdiction, as an agricultural product in another, and tangible personal property in a third.
Who pays, and who is exempt? Individuals, entities and organizations that are required to pay sales tax in one jurisdiction may not be required to do so in a neighboring jurisdiction. For instance, Federal government entities are not required to pay California sales taxes, but in Arizona, the seller may pass on the charges for the state’s “Transaction Privilege Tax” to certain Federal government customers under certain circumstances. The requirements for verifying and documenting sales tax exemptions — as well as resale exemptions for qualifying non-retail sales — vary by jurisdiction too. On top of that, most states will not accept a reseller or exemption certificate issued by another state.
How is “significant economic presence” defined in each state? When the Supreme Court in Wayfair struck down the requirement for retailer to have a physical presence in the jurisdiction before it could be required to collect and remit sales tax, it suggested that establishing a threshold of “significant economic activity,” such as South Dakota’s $100,000 in retail sales or 200 transactions would pass Constitutional muster. Of the 45 states (plus the District of Columbia) that have statewide sales taxes, 42 have enacted “Remote Seller Economic Nexus” laws. (Kansas has, to date, not passed a nexus law but the Kansas Department of Revenue claims the authority to require remote seller collections without one). Each state’s threshold is based on a certain level of sales, a number of transactions, and/or both, but the level of economic activity deemed “significant” varies. For instance, Illinois’ economy (as measured by annual GDP) is nearly 17 times greater than South Dakota’s, according to Statista, yet its economic nexus thresholds are nearly identical (based on $100,000 in sales or 200 transactions).
Further, there is no common definition of what sales count toward these thresholds — gross sales, retail sales, taxable sales, just taxable sales of tangible personal property, etc.
The list of thorny issues remote sellers face goes on:
- How does a seller deal with overpayments/underpayments when the transaction is paid by check or purchase order?
- If a seller offers credit, how does it handle bad debts?
- What happens when the software calculates the wrong rate?
- When the customer uses the wrong exemption certificate, or claims an exemption to which they are not entitled, but provides the correct for it?
- Are there sales tax “holidays?” If so, when? What sales do they cover?
This byzantine system of state and local sales taxes has always been predicated on the notion that all sales are local. The fabric store on the corner can manage one city’s taxes; the furniture store next door can handle two or three local rates for the towns they deliver into. The only way a remote seller can navigate the bewildering array of jurisdictions, rates, taxable products and services, thresholds and records requirements is with specialized software.
As you navigate sales tax collection from the 45 states, it’s worth reviewing this flow chart from the Illinois Department of Revenue provided you take the following into consideration: While mostly applicable beyond IL, the language used by each of the states needs to be investigated thoroughly. It’s strongly advised that you review this page from the IL DOR’s site for details. Most notably, review the question “What sales are excluded from the threshold determination?” And keep in mind that each state’s language is unique to that state. They may use the same words, but the definitions differ.
- Recent Nonstatutory State Reactions to Wayfair – February 2020
- State Sales Taxes in the Post-Wayfair Era – Dec. 2019
- States Should Exempt Non-Taxable Sales When Setting Wayfair Thresholds – Sept. 2019
- Tax Jurisdictions Count – July 2019
- How Tax Jurisdictions Factor Into Complexity – April 2018
The complexity of collecting and remitting sales taxes across state lines is no secret – in fact, it’s a selling point for the software companies and consultants which specialize in the field. The software company Avalara, regarded by many as an industry leader, boldly proclaims “We live and breathe tax compliance so you don’t have to.” Avalara and its peers are businesses, not charities, and their expertise comes with a steep price in direct, indirect and opportunity costs. Despite the claims, there is no “free” software available for all remote sellers. In theory, certain states, primarily the 24 members of the Streamlined Sales and Use Tax Agreement (SSUTA), will subsidize the software and services of a select group of “Certified Service Providers.” However, this is not available for the states with the largest economies (California, Texas, New York, Illinois, et al.) or most complex taxing requirements (Alabama, Colorado). And even in states where the CSPs are “free” for remote sellers, there are still restrictions that incur out-of-pocket expenses, such as limits on API calls or non-taxable transactions.
Then there are the costs – in money, time, and staff – to integrate the sales tax processing software with the seller’s systems. Many, if not most, catalogers rely on home-grown enterprise systems built up over years. Programming these legacy systems to work with available sales tax software has proven – in practice, repeatedly – to be hugely expensive and time consuming. This is a particular burden on smaller companies, where the IT and accounting “departments” may well be just one person each.
The costs continue even after the software and procedures are in place, and the staff trained. Someone has to compile the information for the returns, and then send that information to the states. Filing through the SSUTA architecture is subsidized by the member states; however, all CSPs charge to file on a seller’s behalf in the non-member states. Sellers are protected from liability for a CSP’s error, either in calculating or remitting taxes, in the SSUTA states; this not necessarily true throughout all the non-member states, so the prospect of back taxes and penalties is a profound concern.
Often overlooked in the debate are the opportunity costs imposed on remote sellers by this needlessly complex sales tax landscape. It is a “zero-sum game”: every resource devoted to sales tax reporting and collection is a resource that is unavailable to other vital business functions. Every dollar spent on compliance is a dollar that can’t be spent on hiring; every hour spent is an hour that could not go to marketing, or customer service, or inventory management.
- Wayfair Revenue Estimates Come Up Short – Aug. 2019
- GAO Sales Tax Collection Report – November 2017
- Costs and Burdens for Remote Retailers to Comply with Sales and Use Tax Collection Obligations – August 2017
- Do you qualify for free sales tax calculation and reporting services?
- Interested in Contracting with a CSP?
4. Safe Harbor & Retroactivity
The South Dakota law upheld in the Wayfair case established a “safe harbor” for sellers with “limited economic activity” in the state. The thresholds, $100,000 in gross sales or 200 individual transactions, were based on the size of the state’s economy and were intended to prevent an undue burden on out-of-state businesses.
Since Wayfair, some variation of $100,000 sales or 200 transactions have become the de facto thresholds across the country, without consideration of the size of an individual state’s economy or tax base. Thus, 201 retail sales of a $5 item into Illinois over the course of 12 calendar months (for example) would trigger economic nexus; if tax was collected on all 201 sales the state would get $65.33 in sales taxes.
This is a very shallow “safe harbor.” South Dakota also explicitly stated its intent to require registration and collection prospectively from the date its law became effective (ultimately November 1, 2018), and not seek taxes retroactive to any previous date. This has not been the case with every state. Massachusetts, in particular, has asserted the right to look back to at least the calendar year prior to October 1, 2017, when its remote seller law became effective. New York, which has had a remote seller law on the books for decades, has not yet stated whether it will seek retroactive taxes. This is a nightmare scenario for a remote seller. Did the customer pay the appropriate use tax at the time? Will the customer do so at this date?
- Vertex Inc. 2020 Midyear Sales Tax Rates and Rules Report
- TaxConnex’s Sales Tax Nexus Guide – January 2020
5. Knowing the Unknown
In the time since the Wayfair ruling, many remote sellers are not collecting sales taxes as they should, a problem that is only increasing as the 2020 pandemic drives more brick-and-mortar stores online. A recent survey of 750 businesses with sales in more than one state indicated that almost 70% (over the course of the four months of the survey) were unaware that it means they may have to collect and remit in every state in which they have sales.
At the other end of the spectrum, only one in four state departments surveyed were even tracking the number of remote sellers that were remitting sales taxes. The Illinois Department of Revenue, which does, reported only 4652 remote sellers filing as of December 31, 2019. There are surely more businesses than that selling into the sixth most populous state in the nation.
6. Wayfair and Marketplace ‘Fairness’
The Supreme Court’s decision in Wayfair rests explicitly on two main arguments: each state’s right to collect sales and use taxes from their citizens regardless of the method of the transaction, and the desire for “marketplace fairness” between e-commerce and “brick and mortar” sellers. There is no dispute that states are entitled to their sales and use taxes. Moreover, since states have always “deputized” sellers within their borders to act as their agents and collect/remit the required taxes, there is – in theory – no compelling reason why a remote seller should not be required to do the same if the ability to do so exists. (It’s the current practice, not the theory, to which we object.)
The idea that e-commerce sellers had a significant advantage over businesses with a physical presence solely, or even largely, because they were not required to collect sales taxes, however, has never had much basis in reality. E-commerce sellers are not reliant on local foot traffic for business; they can be open 24/7 without additional staff; they can specialize in niche products that would not be profitable in their local geographic area; and they have the potential to benefit from economies of scale similar to what “big-box” retailers possess. Sales tax is an afterthought compared to these factors.
7. The Streamlined Sales and Use Tax Agreement (SSUTA)
The SSUTA was the result of an initiative by the National Governors Association and the National Conference of State Legislatures to simplify state sales tax collection and provide justification for Congress to pass legislation overturning the Supreme Court’s rulings on physical presence. It is similar in concept to the Interstate Fuel Tax Agreement (IFTA), which began as a multi-state compact to simplify motor fuel use tax collection for the trucking industry, and was codified into US law in 1991.
The SSUTA focuses on “four major requirements for simplification of state and local tax codes: 1) state level administration, 2) uniform tax base, 3) simplified tax rates, and 4) uniform sales sourcing rules. The agreement simplifies both the registration and filing process for businesses making sales in multiple member states by providing one portal for both. It also provides remote sellers access to state-subsidized sales tax processing software from various Certified Service Providers (CSPs) at no charge, under certain conditions. These advantages – “free” software, simplified rates and simplified registration and reporting – were explicitly cited by the Supreme Court as reasons why South Dakota’s remote seller law would satisfy the Commerce Clause’s prohibition against “undue burdens” in interstate trade.
There are a number of drawbacks to the SSUTA, however. Not only are there just 24 member states, but that number does not include the largest sales tax collection states by population: California, Texas, Florida, New York, Illinois, and Pennsylvania. What’s more, no states have joined or applied to join since Wayfair was decided, as there’s simply no incentive to do so any longer. Furthermore, SSUTA guidelines and requirements are not codified into law and may be changed without warning by the Streamlined Sales Tax Governing Board, which has no business representation (there is a “business advisory board” whose membership is voluntary and can only make “recommendations”). Finally, as a practical matter, remote sellers who register through the SSUTA must register with all member states, not simply those where they meet a threshold or even conduct business. Thus, they incur reporting obligations and audit liability in states where they would otherwise have none.
8. Public Law 86-272
The Interstate Income Act of 1959, also known as Public Law 86-272, restricts states from collecting income tax on sales of tangible personal property solicited by remote sellers within its borders, as long as the orders are filled or shipped outside of the state. The Wayfair ruling has given many states an opening to skirt this law by means of economic nexus. For instance, Texas imposes a “franchise” (privilege) tax based on income derived within the state on “each taxable entity formed, organized or doing business in Texas.”
Per the Texas comptroller, “Each taxable entity with nexus must file a Franchise Tax Report and a Public Information Report or Ownership Information Report and pay any franchise tax due.” The Pennsylvania Department of Revenue asserts “the decision in Wayfair has made certain that, at least prospectively, no physical presence standard exists for purposes of limiting the ability of a state to impose a net income tax on an out-of-state taxpayer so long as the constitutional requirements under the Due Process and Commerce Clauses of the United States Constitution are satisfied.”
These attempts at “taxation without representation” are just the tip of the spear. If states can impose income taxes by virtue of an arbitrary economic nexus threshold, what other taxes and regulations are next?
- NTU Applauds Sensenbrenner Bill to Contain Fallout from Supreme Court Decision on Internet Sales Tax – Sept. 2019
- Online Sales Simplicity and Small Business Relief Act of 2019 (Senate) – July 2019
- Online Sales Simplicity and Small Business Relief Act of 2019 (House) – May 2019
- Interstate Income Act of 1959 / Public Law 86-272
9. Prior Attempts at Legislative Solutions
Since at least 2010, there have been repeated efforts to legislate national sales tax policy – often under the banner of “Marketplace Fairness.” Since Wayfair, at least six bills have been introduced in Congress that would require any nationwide sales tax regime to be predicated on simplification of rates and regulations, as well as no retroactive enforcement. Few made it out of committee and none have been passed, primarily because of opposition from the states and reluctance in Congress to “tell the states what to do” despite the fact that Congress has the explicit right under the Commerce Clause to regulate commerce between the states.
The National Council of State Legislatures (NCSL) has been a strident advocate against Federal legislation in this arena. It has opposed every effort at sales tax collection reform since (at least) the Wayfair decision was announced. As its policy position states: “NCSL strongly opposes any federal effort that would limit or delay the ability of states to collect sales taxes from remote sellers.” NCSL has opposed multiple bills that would have required simplification of sales tax regulations for remote sellers and prohibited retroactive enforcement of such laws. In short, the NCSL stands firmly opposed to the components of Federal law that the Supreme Court explicitly stated would pass Constitutional muster in its Wayfair decision.
10. A Way Forward
As it stands, the current system does not benefit the states and actively harms businesses. States are getting only a small fraction of the tax revenue due to them. Remote sellers are faced with the choice of expensive and difficult compliance on their own; selling through a marketplace facilitator such as Amazon or eBay, with all the challenges those and others pose, or throwing in the towel.
It doesn’t have to be this way. The IFTA provides a model. Like the SSUTA, it started as a compact between a handful of states looking to streamline a hideously complex and grossly inefficient cross-border tax regime. The IFTA also provides a precedent. Congress wrote it into law with the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), giving non-member states five years to get onboard and providing assistance to do so. While not perfect, the SSUTA provides a structure so the wheel does not have to be reinvented, just tweaked. The SSUTA members also have a uniform definition of taxable products and services. Texas, Alabama and Louisiana have shown that a single rate per state is both possible and practical.
There is no reason, in theory, why a one- or two-page “EZ” report is infeasible if rates are simplified. Each state’s taxing authority already has established relationships with businesses within the state, so no new bureaucracy is required if a remote seller reports and remits taxes collected on out-of-state sales along with in-state sales. States already have established procedures for distributing motor fuel use taxes to the others. Without action by Congress, however, the states have little incentive or appetite for the work necessary to overhaul the current system.
- Standard State Level Sales & Use Tax Rates – August 2020
- Intermodal Surface Transportation Efficiency Act of 1991
- Survey Shows Many Businesses Still Unaware of Economic Nexus – June 2020
Unity, uniformity and simplicity are crucial for a sound, constitutionally valid remote sales tax regime. Therefore, the ACMA supports legislation that incorporates the following principles:
- The base jurisdiction concept, which allows a remote seller to report and remit sales/use taxes to a base state for distribution to other member states in which the remote seller made taxable sales. The base state would also be responsible for disseminating information on other states’ requirements, as well as conducting necessary audits.
- Retention of each state’s (or equivalent, to include DC and the members of the Alaskan municipal compact) sovereign authority to determine tax rates, exemptions and exercise other substantive tax authority.
- The option of one simplified rate per state/state-equivalent for remote sellers to collect and remit.
- A uniform definition of taxable products and services.
- Uniform requirement for recording and reporting tax-exempt sales, with the burden of proof/liability on the purchaser.
- No retroactive enforcement to periods pre-Wayfair.
- Recognition of good-faith efforts towards compliance for a period post-Wayfair.
- ALEC Tax Task Force Presentation – July 2020
- Smaller Sellers Searching for Relief in Post-Wayfair World – May 2020
- ACMA Written Testimony House Small Business Committee Hearing – March 2020
- Halstead Bead Written Testimony House Small Business Committee – March 2020
- Halstead Bead Oral Testimony House Small Business Committee – March 2020
- Halstead Bead Additional Statement Before House Small Business Committee – March 2020
- K-Log Written Testimony House Small Business Committee – March 2020
- TaxConnex’s Sales Tax Nexus Guide – January 2020