Online Sales Tax Compliance in Sharper Focus After High Court Debate

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By Ryan Prete

Practitioners found it significant that the U.S. Supreme Court zeroed in on conflicting estimates of digital sales tax compliance costs during oral argument in the largest tax case in years.

Attorneys representing parties in South Dakota v. Wayfair cited seller compliance costs between $12 and $250,000 during April 17 oral argument. The case is directly challenging the high court’s 1992 decision in Quill Corp. v. North Dakota, which prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. Practitioners expect a decision by late June.

Justice Stephen Breyer notably was perplexed over the estimate gap, addressing it numerous times throughout the argument.

“And you say: It’s going to cost thousands and thousands of dollars for a small business, maybe all their profits eaten up in hiring accountants. They say: That won’t be necessary. We’ll do it on software,” Breyer said to George Isaacson, counsel for e-retailers Wayfair Inc., Newegg Inc., and Overstock.com Inc.

“Both are logical. How do I decide who’s right?” Breyer added.

The 26-year-old Quill case has sparked perhaps the largest wave of state and local tax-related activity during the past decade in attempts to “kill Quill”, as the modern marketplace has spilled outside geographic borders and increasingly migrated to e-commerce. However, as states have attempted to soften the revenue blow from untaxed online transactions, retailers have raised concerns about the costs of complying with thousands of taxing jurisdictions. In particular, smaller sellers without the deep pockets or resources of larger retailers have been anxious about the potential death of Quill.

However, both sides of the digital sales tax dispute have long battled over the exact compliance costs for retailers—as well as the losses for states stemming from the Quill limitation.

Amazon Questions

Even e-commerce giant Amazon.com, Inc. has never disclosed their compliance costs. And as of early 2017, the megalith collects and remits sales and use taxes in all states that administer them at the statewide level.

Justice Breyer specifically asked during oral arguments about Amazon’s compliance burden. Issacson said he was unaware of the company’s exact costs.

Amazon didn’t immediately respond to a request for comment.

Amazon made 177.9 billion in revenue in 2017, and has a market cap of $725.66 billion.

Not One Estimate

Fred Nicely, senior tax counsel for the Council On State Taxation, told Bloomberg Tax it would be hard to land on a rough estimate for small and medium-sized businesses because of the number of tax rates in each state.

“I don’t think there’s a compliance estimate that would apply to a seller in all states,” Nicely said. “Each state’s amount of tax jurisdictions varies greatly. We could come to a conclusive estimate if more states adopted uniform laws.”

Nicely said that PricewaterhouseCoopers conducted the most readily available report on compliance costs—in 2006. He said the report noted that sellers under $1 million had average compliance costs of 13.47 percent, sellers from $1 million to $10 million averaged compliance costs of 5.2 percent, and sellers over $10 million incurred compliance costs of 2.17 percent—with a weighted average for all sellers of 3.09 percent.

Sellers have to comply with a variety of state tax collection regimes, which have proliferated in number in recent years, including:

  •  economic nexus models that impose sales tax collection duties on retailers that rise above a specified sales threshold;
  •  Colorado-style notice/reporting regimes that require retailers to alert customers to their tax liabilities;
  •  marketplace provider provisions that require Amazon-type sellers to collect sales tax on third-party transactions conducted on their platforms; and
  •  “cookie nexus” regulations, which require online vendors to collect state sales tax if they have property interests in or use in-state apps and “cookies.”

Toilet Paper Comparison

Compliance costs all depend on the number of transactions, according to Scott Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara Inc..

“At least for us at Avalara, our pricing depends by volume, so we could technically have customers that fit the entire range presented before the justices,” Peterson told Bloomberg Tax.

He said that sellers could pay as little as $50 a year for sales tax compliance services offered through Avalara.

“I always compare tax compliance costs to toilet paper, which is also a function of volume,” he said. “A company like Amazon or Overstock is going to use way more toilet paper than a small or medium-sized business.”

Peterson said that while he was unaware of how many transactions would generate a $200,000 yearly compliance cost, he said it would take “a ton of transactions.”

Free Is Never Free

However, Steve DelBianco, president and CEO of NetChoice, a Washington-based internet commerce trade association, told Bloomberg Tax that free software programs, and even those reportedly offered for $12 a month, offer little to no guidance for sellers.

“These programs only offer users the ability to look up tax rates, and don’t include necessary integration services,” DelBianco said. “It’s ridiculous—you’re really telling me after a sale I’m going to just open an app, look up the tax rate, and be done? No way.”

DelBianco said that many overlook factors not directly associated with tax software programs, which could cost sellers thousands of dollars. These include the risk of audit, maintenance and integration of software, and the risk of mistakes.

Mistakes can include software dysfunctions and errors in categorization of items, which could lead to accidental exemptions and eventually hefty fines from states.

What Should Sellers Do?

A potential June decision gives sellers who aren’t collecting sales tax a limited amount of time to weigh their options for how to comply.

Harley Duncan, leader of the state and local tax group of the Washington National Tax practice at KPMG LLP, told Bloomberg Tax that sellers need to look ahead now, analyze where they conduct business, and decide whether compliance is the right choice.

“The things I would focus on if I were a seller are understanding where I currently collect and where I might have to soon collect, if Quill is undone,” Duncan told Bloomberg Tax. “You also have to look at what technology platform, if any, you’re currently using, and what platform you might adapt in the near future.”

DelBianco also said it’s prudent for sellers to make sure they understand the cost, complexity, and time it would take to integrate a tax software program, which he said could take months to sufficiently install and set up.

Not Just About ‘Quill’

Ultimately, although the U.S. Supreme Court may overturn Quill, “attaining a level of sales tax simplification that satisfies a constitutional ‘commerce clause’ requirement should not be confused with constructing an efficient and fair modern-day sales tax system,” said Douglas Lindholm, president and executive director for COST.

On April 19, COST released its first scorecard grading states on their overall sales tax laws and rules, and the fairness and efficiency of those systems for both sellers and purchasers.

The top-ranked sales tax administration states were Indiana, Michigan, Ohio, and Wisconsin, according to the report. The bottom ranked states were Colorado, Louisiana, and New Mexico.

The U.S. Supreme Court may overturn the longstanding Quill precedent in the Wayfair case, but attaining a level of sales tax simplification that satisfies a constitutional “commerce clause” requirement should not be confused with constructing an efficient and fair modern-day sales tax system, COST said in an April 19 release accompanying the scorecard.

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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