Sales Tax Slice: Are State Sales Tax Regimes Going the Way of Mail on Saturday?


Following a $15.9 billion loss in the past year, the U.S. Postal Service announced plans to discontinue Saturday deliveries for everything except packages. A major part of the U.S. Postal Service's financial woes stem from the rise of email over traditional letters and the increased popularity of package deliveries from internet transactions. The emergence of the World Wide Web has also had a negative impact on state coffers.

Sales tax regimes came into existence long before the rise of electronic commerce. In most states, sales taxes are imposed on sales of tangible personal property and certain services, and tax collection duty rests with retailers doing business in the state. The challenge for the states is to maintain revenue collection streams by transforming tax imposition and collection provisions to correspond with new types of technology, transactions, and business models.

State attempts to transition the imposition of sales taxes from purchases of tangible personal property to include electronic transactions (including cloud computing "services"), as well as ensuring compliance with tax collection responsibilities for purchases made via the internet, are hindered by objections to expanding the tax base, and restrictions on states' ability to require out-of-state retailers to collect and remit sales tax (Quill, remote seller nexus).

 Over the past few years several states have enacted so-called Amazon laws aimed at taxing remote retailers with in-state "affiliates." In addition, lawmakers in many states are considering proposals to expand the tax base to include services, which could apply to certain types of internet transactions.

 There seems to be broad support for federal legislation that would re-level the playing field by effectively overturning the "physical presence" requirement set forth in U.S. Supreme Court's 1992 Quill decision.

 But until a resolution on the sales tax issue is reached, many of the same transactions that can be made without purchasing a stamp can also escape sales tax. While some may cheer the absence of an enforceable sales tax obligation, the status quo is likely to produce compliance headaches for consumers and businesses that must comply with the current patchwork of varying sales and use tax collection requirements.

 In the spirit of Valentine's Day, consider the following scenarios to illustrate the state tax collection and U.S. Postal Service charges applied to transactions involving Mr. Right, who lives and works in New Jersey, and takes various approaches to making Valentine's Day special for Mrs. Right, who also lives in New Jersey but works in New York. State-level sales taxes and the corresponding U.S. Postal Service receipts are calculated on these transactions of differing technological sophistication, under authority N.J. Rev. Stat. §54:32B-3, -3.1, -6; N.Y. Tax Law §1105(b); N.Y. Comp. Codes R. & Regs. §525.2(a)(3); Amazon.com LLC v. New York Dept. of Taxn. and Fin., No. 1534 1535 601247/08 107581/08 (N.Y. App. Div. Nov. 4, 2010).

 Scenario:

New Jersey State Sales Tax, at 7%

U.S. Postal Service

New York State Sales Tax, at 4%

Mr. Right purchases a greeting card from a local store for $3 and hand-delivers it to Mrs. Right at their home.

$0.21

(Tax applies to sale of tangible personal property, sourced to New Jersey.)

$0

$0

Mr. Right purchases a greeting card from a local store for $3 and mails it by U.S. Postal Service to Mrs. Right at her workplace.

$0.21

(Tax applies to sale of tangible personal property, sourced to New Jersey.)

$0.46

(Cost of postage stamp.)

$0

Mr. Right purchases an e-card from a website for $3 and emails it to Mrs. Right at her workplace.

$0

(Digital products are taxable, but the sale is sourced to the delivery location, New York.)

$0

$0

(Digital products are not taxable in New York.)

Mr. Right emails a letter ($0) to Mrs. Right at her workplace.

$0

$0

$0

Mr. Right purchases a giant stuffed teddy bear from a corner store for $50 and ships it by U.S. Postal Service (cost of $15) as a surprise to Mrs. Right at her workplace.

$3.50

(Tax applies to sale of tangible personal property, sale is sourced to New Jersey.)

$15

$0

Mr. Right purchases a giant stuffed teddy bear from Amazon.com for $50 and has it shipped by U.S. Postal Service (for a $15 charge) to Mrs. Right at their home.

$0

(Amazon.com does not yet collect sales tax on items delivered to New Jersey residents, but New Jersey law says Mr. Right must remit $3.50 in use tax.)

$15

$0

Mr. Right purchases a giant stuffed teddy bear from Amazon.com for $50 and has it shipped by UPS (for a $15 charge) to Mrs. Right at their home.

$0

(Amazon.com does not yet collect sales tax on items delivered to New Jersey residents, but New Jersey law says Mr. Right must remit $3.50 in use tax.)

$0

$0

Mr. Right purchases a giant stuffed teddy bear from Amazon.com for $50 and has it shipped by U.S. Postal Service (for a $15 charge) to Mrs. Right at her workplace.

$0

(Tax does not apply because the sale is sourced to the delivery destination, New York.)

$15

$2.00

(Sale is sourced to delivery destination, New York.  Amazon.com collects New York sales tax.)

Mr. Right purchases a giant stuffed teddy bear from Amazon.com for $50 and has it shipped by UPS (for a $15 charge) to Mrs. Right at her workplace.

$0

(Tax does not apply because the sale is sourced to the delivery destination, New York.)

$0

$2.00

(Sale is sourced to delivery destination, New York.  Amazon.com collects New York sales tax.)

 By Christine Boeckel

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