States adjusting to collect e-commerce sale taxes

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E-commerce retail sales grew to 10.7% of all retail sales in the second quarter of this year as states adjust their laws to collect sales tax from this fast growing sector.

Many state legislatures have enacted laws similar to South Dakota’s since the U.S. Supreme Court ruling in June 2018 that upheld that state’s 2017 law requiring sales tax collection if a retailer has at least 200 transactions or $100,000 in sales in the state over a calendar year.

The ruling has been a blessing for state governments as they try to strike a balance funding their ongoing operational costs with financing infrastructure projects, oftentimes through bond issuances.

Texas is scheduled to require remote sales tax collection beginning Oct. 1 while Florida and Missouri are among the few states that have yet to set a deadline.

The U.S. Commerce Department reports that e-commerce sales are increasing more than three times faster than overall retail sales.

E-commerce sales rose 13.3% on a year-over-year basis for the April through June quarter compared to a more modest 3.2% for overall retail sales in the same period.

E-commerce’s share of overall retail sales grew almost a full percentage point over that same period.

“I don’t think there’s any sign of it slowing down,” said Craig Johnson, executive director of the Streamlined Sales Tax Governing Board. “I think that e-commerce is just going to continue to grow. People have gotten very comfortable with it. And part of that credit goes to the e-retailers in the sense that if you order sometime and there’s a problem with it, it’s easy to get it returned.”

Since the Supreme Court ruling the number of sellers that have registered with the Streamlined Sales Tax Governing Board has jumped to over 7,400 from 3,900, said Johnson.

Johnson’s alliance of states offers sellers a list of certified service providers that can fulfill the seller's obligation to remit tax on purchases made around the nation.

John Hicks, executive director of the National Association of State Budget Officers, said in an email that the continuing jump in e-commerce sales provides “further evidence of the growing shift of consumer purchases.”

“State sales taxes have always been owed by online customers and the U.S. Supreme Court’s decision in Wayfair v. South Dakota enabled states to create mechanisms to collect these taxes,” Hicks said.

The Wayfair ruling said South Dakota met several requirements for not placing an undue burden on interstate commerce, including the state’s adoption of streamlined sales tax rules and the existence of only one statewide sales tax.

Thirty-seven states and the District of Columbia now have laws requiring remote sales tax collection, according to the National Conference of State Legislatures.

“State revenue forecasters have built in an additional two percent more in sales taxes, on average, as a result of their implementation of the court’s decision,” Hicks said.

Implementation is ongoing in the 45 states that levy sales taxes. Alaska, Delaware, New Hampshire, Oregon and Montana do not have statewide sales taxes, although some communities in Alaska do levy them.

Businesses that didn’t have to worry about collecting sales tax for out-of-state sales prior to the Supreme Court ruling now have to make a transition, said Richard Cram, director of the Multistate Tax Commission’s National Nexus Program.

Cram is chairing a task force of state officials and representatives of the business community that is looking at how best to make the transition.

“It’s a work in progress,” Cram said. “I think everybody is trying to move forward, but it will take a while to get compliance where it needs to be.”

The group held the first in a planned series of conference calls on Thursday as it works on a white paper it plans to release before the end of the year to advise state legislatures on best practices and fixes for unanticipated problems they might adopt during their 2020 legislative sessions.

Giant internet retailers like Amazon and Walmart already have computer software to determine what’s taxable and what the rates are, but many smaller sellers didn’t have to address the issue prior to the Supreme Court ruling, Cram said.

“Businesses are trying to determine what’s taxable in this state but exempt in another state,” he said. “What are the rates that apply. What is the local rate. Getting those folks up to speed is going to be a transition process.”

Although most states have begun requiring out-of-state vendors to collect sales taxes, there have been variations and complications in the implementation.

Fifteen states have adopted a broad definition of marketplace facilitator/provider: California, Iowa, Idaho, Kentucky, Massachusetts, North Dakota, New Jersey, Nevada, Ohio, Rhode Island, Utah, Virginia, Vermont, Washington and West Virginia.

Nineteen states and the District of Columbia have adopted a narrow definition of marketplace facilitator/provider: Arkansas, Arizona, Colorado, Connecticut, the District of Columbia, Hawaii, Illinois, Maryland, Maine, Minnesota, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Wisconsin and Wyoming.

Seven states have carved out exemptions for advertising (California, Colorado, Maryland, Nevada, Ohio, Virginia, Washington) while others have enacted exemptions for payment processors, delivery businesses, peer-to-peer car sharing or car rentals.

Nevada, where the state economy is heavily reliant on tourism, has established exceptions for travel packages, car rentals and accommodations.

California’s advertising exclusion states, “Newspapers, internet websites, and other entities that advertise tangible personal property for sale, refer purchasers to the seller by telephone, internet link, or other similar means to complete the sale, and do not participate further in the sale are not facilitating a sale under this chapter.”

Cram expects a number of states to be approached by businesses requesting exemptions or flexibility.

“It’s early in the process,” he said. “There will probably be folks going to state legislatures next year asking for more exclusions. There will be lots of situations nobody thought of where the marketplace facilitator model won’t work very well.”

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