Sales
On The Internet
A
company which is
selling goods over the Internet and has a presence
in the state of delivery, ie has established nexus
in that state, will be required to register to
collect sales tax on all taxable goods.
However,
in many, perhaps most cases, an Internet sale
will not involve nexus in the receiving state,
and the Supreme Court has prevented states from
imposing sales tax on out-of-state supplies in
that situation. Arguably, use tax provisions should
then step in and impose tax on the sale, but the
reality is that the operation of such consumption
taxes depends heavily on the ability of the taxing
authority to find traces or records of transactions,
thus motivating taxpayers to comply with the law
because of the near-certainty that they will be
found out if they don't.
It seems obvious that once an individual consumer
can buy and receive digital but taxable goods
or services through the Internet, then it is going
to be hard to collect tax if the seller is outside
the tax jurisdiction. The taxing authority won't
know and can't know about the transaction unless
the consumer chooses to tell them, which history
says is not likely!
The
supply of goods ordered and paid for from a distant
seller and requiring physical delivery within
the taxing jurisdiction is a simpler case, because
a cross-border transit is necessary. The supply
is taxable only when there is nexus, and even
then enforcement can be patchy; but Internet sales
of this type are no different from existing mail-order
catalogue sales.
In
reality, for traders within the US who obey local
tax laws, the Internet has been an almost tax-free
zone because of the moratorium on Internet access
taxes and the ban on taxation of inter-state supplies
of products and services.
For
many states, on-line cigarette sales are particularly
hurtful for the tax-base. States like New York
and New Jersey find tax revenues dropping dramatically
as smokers buy from on-line stores.
Cigarettes
are a special case, because the 1949 The Jenkins
Act requires vendors that ship cigarettes to another
state to provide customers' names and addresses
to taxing agencies in the receiving state. Most
Internet cigarette vendors do not comply with
the Jenkins Act, but some do, and their customers
are receiving substantial tax claims from their
home states - up to thousands of dollars in some
cases. New Jersey, Pennsylvania, Ohio and New
York City are among the municipalities that are
billing residents.
The
response of the states to this situation was to
try to assert nexus in a wider range of situations;
but they have not been very successful in this
endeavour. They have also banded together to develop
the Streamlined Sales Tax Program,
(SSTP or SSUTA) which will regularize Internet
sales taxation and may lead Congress to loosen
the rules against inter-state sales taxation.
In
December 2007, the US Electronic Retailing Association
(ERA), has announced that it was "strongly
against" taxation of internet transactions,
and that it intends to fight the Streamlined Sales
Tax Project (SSTP).
According
to the ERA, the only trade association that exclusively
represents electronic retailers, the SSTP would
impede the development of e-commerce and impose
substantial added costs and compliance burdens
on electronic retailers. As an urgent industry
and legislative concern, the groups said that
the collection of taxes on internet transactions
is an issue that must be dealt with "thoroughly
and fairly".
“In
a very short amount of time, the internet has
become an unprecedented marketplace where the
playing field is level for retailers both large
and small,” Barbara Tulipane, ERA President
and CEO, noted in a statement. “The Streamlined
Sales Tax Project and its provisions would create
a cost-prohibitive barrier for smaller retailers
who are the lifeblood of our economy.”
Under
the Streamlined Sales Tax Project (SSTP), states
are required to establish uniform definitions
for taxable goods and services, and maintain a
single statewide tax rate for each type of product.
The project also seeks to simplify tax reporting
requirements for online sellers. But while some
retailers support the SSTP, businesses in general
are lukewarm or hostile to the plan, which they
say will impose burdensome new recording and reporting
requirements.
The
ERA believes that while the original Streamlined
Sales Tax Agreement (SSTA) approved by Congress
was created to simplify multiple taxing jurisdictions,
the current plan will make commerce more complicated
for both merchants and consumers. The SSTA now
permits each state to adopt an additional rate,
and with 7,500 sales tax jurisdictions in the
US, the ERA claims that there could be as many
as 15,000 tax rates to administer.
“The
Streamlined Sales Tax Agreement is a moving target.
Its supporters claim that they have a streamlined
collection system. That’s just not true
– in fact their proposal has grown in complexity
over the years due to the many interested parties,”
argued Edwin Garrubbo, CEO of Creative Commerce.
“It would be a nightmare for retailers to
implement this system.”
The
ERA thinks that the SSTA would unfairly discriminate
against remote sellers in four ways: first, the
burdens are much greater for remote sellers who
must compute, collect and remit tax for thousands
of jurisdictions, as compared to an in-state retailer
who collects at just one tax rate; second, a direct
marketer must “eat” the difference
if a customer fails to remit the correct tax when
paying by check – a problem that traditional
retailers do not confront; third, in-state retailers
benefit from a wide variety of state and local
government services and programs (including tax
incentives) that are not available to out-of-state
merchants; and fourth, delivery charges on internet
and catalog purchases usually exceed the amount
of sales tax on those same goods – so the
remote seller has no price advantage.
To
date (2009), 22 states have adopted the SSUTA
(Streamllined Sales and Use Tax Agreement, as
it now is), representing 31% of the US population.
Yet without a clear steer from Congress, the SSUTA
remains little more than a brave attempt at harmonization.
Attempts
to persuade Congress to act continue. In April,
2009, the National Conference of State Legislators
(NCSL) sponsored a bill in Congress following
a report commissioned by the Streamlined Sales
Tax Governing Board which estimates that, between
now and 2012, States stand to lose up to USD52bn
in uncollected sales taxes on e-commerce transactions.
This
type of legislation has been tried in every Congress
since 2003, but has never passed either chamber.
The bill would enable States that have complied
with the Streamlined Sales Tax (SST) initiative
to require all online retailers to collect and
remit sales tax from consumers who live in those
States. Neil Osten of the NCSL says the bill will
provide compensation for the cost of complying
with the sales tax legislation.
Meanwhile
some states are taking action on their own initiative.
In May, 2009, California Assembly Member Nancy
Skinner (D-Berkeley) introduced Assembly Bill
178, legislation that would modify the state's
existing sales tax law in order to rake in extra
revenue from internet sales. This has sparked
debate on how to protect 'neighbourhood stores'
from internet competition.
Modeled
on New York State's recent Internet Sales Tax
provision, AB178 claims that any web publisher
who displays advertising from an out of state
retailer, and subsequently earns a commission
on a sale as a result of that advertising, establishes
a presence in the state for the retailer, requiring
it to collect sales tax on all orders received
from residents of California. New York expects
to collect approximately an extra USD70m by year's
end. Skinner’s bill could generate USD150m
for California.
But
this legislation seems misconceived: affiliate
marketers, who are the targets of this tax measure,
are not an integral part of the internet retailers
in question. Rather, they are paid for performance-marketing
advertising. Affiliate marketers have websites
that can be blogs, coupon sites, news sites, video
websites - the whole range. By posting advertising
on their websites, affiliates help customers to
click through to a retailer's site and in turn
are paid a small commission if a sale is made.
Affiliates do not transact sales; they do not
accept money for sales; they do not deliver products
or services to consumers. Less than a week after
the New York law was enacted, more than 250 retailers
dropped all of their affiliates in New York, leaving
thousands of affiliates, small- and medium-size
businesses, severely compromised. In California,
an estimated 30,000 small businesses use this
business model, and many would go to the wall
if the bill eventually goes through, while others
will see much lower taxable income. The bill singles
out performance-based online advertising and creates
an extremely uneven playing field compared to
other types of online and offline advertising,
say its opponents.
Advocates
of the bill enlist sympathy by blaming the ecommerce
retailers for the demise of 'friendly neighbourhood
stores' and claim that 'a level playingfield'
needs to be created to force the internet sellers
to compete on equal terms. But, say opponents,
they fail to acknowledge the huge advantages to
consumers brought by the internet in terms of
finding more easily the right product at the right
price to suit their needs and the fact that the
internet has been the engine for new job creation
providing hitherto unknown opportunities for self
employment in niche businesses. The reality is
that the competitive position of neighbourhood
businesses can be only marginally affected by
squeezing out affiliate marketers and the main
objective is quite clearly to generate more revenue;
even this is of doubtful worth when set against
the loss of income tax and opportunities for small
business and job creation.
AB178
was due for a hearing by Assembly Revenue and
Taxation Committee on April 27, but was withdrawn
at the last minute. Now it may not be voted on
until January 2010 at the earliest. However the
contents of the failed bill could be pushed through
unnoticed in another bill or as an annual budget
item.
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