Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Ryan Prete
“Cyber Monday” sales brought in billions that could boost states’ sales tax revenue, but significant money will be left on the table as untaxed third-party marketplace sales continue to grow.
According to Adobe Analytics, consumers collectively spent $6.59 billion online during Cyber Monday on Nov. 27, which was the largest online sales day in U.S. history. This was a 16.8 percent increase from Cyber Monday 2016, and actually topped Black Friday sales by $1.56 billion, according to Adobe.
The 45 states that impose a state sales tax should see increased sales tax revenue from the historic day of online commerce. However, they are missing out on significant revenue from items sold through third-party marketplace sellers on platforms such as Amazon.com Inc., eBay Inc., and Etsy Inc.
Amazon just this year agreed to collect sales taxes on inventory sales in every state with such a tax. But the Tax Foundation has reported that third-party marketplace sales count for about half the goods sold on Amazon alone, echoing Amazon CEO Jeff Bezos’s 2016 breakdown of his company’s direct and marketplace transactions. While Amazon has informed marketplace sellers that it will collect and remit Washington state sales tax on third-party marketplace sales beginning Jan. 1, the company hasn’t announced it will collect tax on third-party transactions in other states.
“The good news on this Cyber Monday is that Amazon and many other remote sellers are now collecting tax. The bad news is that the economy, and in particular the retail economy, is changing faster than the states and our tax laws can keep up,” Joe W. Garrett Jr., deputy commissioner of revenue with the Alabama Department of Revenue, told Bloomberg Tax.
“Much of what’s being purchased today will be from third-party sellers using an online platform like Amazon or eBay, and the states will collect very little of the tax due from those purchases,” Garrett said.
States are awaiting a U.S. Supreme Court decision on South Dakota Attorney General Marty Jackley’s (R) request for review of a state Supreme Court ruling that found the state’s “economic nexus” law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), unconstitutional under Quill Corp. v. North Dakota—the 1992 U.S. Supreme Court ruling that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state ( South Dakota v. Wayfair, Inc., U.S., No. 17-494, friend-of-the-court briefs 11/2/17 ).
South Dakota and other states are attempting to undo Quill and capture sales tax revenue lost through remote sales. Similar disputes are pending in Alabama, Tennessee, Wyoming, and Indiana.
The chief problem doesn’t lie solely with Goliath-like companies such as Amazon, according to John Buhl, media relations manager at the Tax Foundation, who said that states are at least partly to blame for the current situation.
“States could certainly miss out on some revenue, but they’re at least partially responsible by not doing more to simplify their sales tax laws,” Buhl said in an email to Bloomberg Tax. “If states want to retain the authority to define what counts as untaxed food versus taxed candy, or what types of clothing to exempt from tax, they need to accept that there is a good rationale for wanting to shield interstate commerce from the administrative costs those decisions impose.”
Buhl said that states can make moves to simplify their sales tax statutes, even as they all hold their breath for a potential U.S. Supreme Court decision.
“E-commerce will continue to evolve. Yes, Congress, or the Supreme Court, will need to take action to move toward a national solution,” he said. “But if states modernize and simplify their sales taxes, they’ll be better positioned to adjust to changing retail trends without fear of seeing their sales tax base erode as consumer preferences change. Creating a sales tax structure that simply responds to Amazon’s business model is like playing whack-a-mole.”
With online shopping steadily growing, Buhl said that states must take the implications of Cyber Monday seriously.
“States should think of Cyber Monday as a reminder that there is potential to raise revenue owed without saddling the economy with unnecessary deadweight loss,” Buhl said.
Deborah White, senior executive vice president and general counsel for the Retail Leaders Industry Association and president of the Retail Litigation Center, told Bloomberg Tax that she sees a severe hindrance for states and brick-and-mortar retailers when it comes to online sales.
“The states are at a disadvantage because they cannot force third-party retailers to collect and remit sales tax, while brick-and-mortar owners are required to do so. States can only benefit from sales tax if it’s being collected,” she said.
White said she is also hopeful that the U.S. Supreme Court will rectify Quill‘s 25-year-old precedent, which would greatly level the playing field between online and brick-and-mortar commerce.
“Until the U.S. Supreme Court does remedy the poor decision set by Quill, there is only so much states can do, so it’s crucial that the Supreme Court reconsiders and overturns the issue,” White said.
White also predicted more states may follow in the footsteps of Washington, Minnesota, and Rhode Island, which require tax collection on third-party marketplace sales, especially if state revenue grows as a result.
The South Carolina Department of Revenue is attempting to collect from Amazon Services LLC taxes on third-party sales facilitated through its marketplace platform, alleging the Amazon subsidiary owes almost $12.5 million in uncollected taxes, penalties, and interest. Amazon is challenging the assessment, claiming it’s unconstitutional and violates state and federal law.
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