Sales Tax Slice: More Carrot, Less Stick – Voluntary Collection Agreements Might be the Future of Capturing Sales Tax from Online Retailers


 

Amid reports of sales tax collections falling short of estimates nationwide, some states are turning to voluntary collection agreements with online retailers in an effort to boost revenues. Ten states have recently entered into such agreements with online behemoth Amazon.com, which will begin collecting and remitting state and local sales tax in Utah, Louisiana, Nebraska, Mississippi, Missouri, Rhode Island, Vermont, South Dakota, Wyoming and Oklahoma in 2017. These agreements are being lauded as having the potential to add tens of millions of dollars to state and local coffers, leading many to wonder how best to convince other retailers lacking physical presence in a state to follow suit.

Utah has taken a particularly interesting approach to incentivize voluntary sales tax collection: increased vendor collection discounts. A retailer with physical presence in Utah is currently entitled to a 1.31 percent vendor collection discount, meaning that these retailers may retain 1.31 percent of the sales tax they collect in order to compensate them for the administrative costs associated with complying with sales tax law. An out-of-state retailer who agrees to voluntarily collect Utah’s sales tax, however, gets to keep a whopping 18 percent of the taxes it collects. Amazon declined to take Utah up on this offer, despite being the first online company to enter into an agreement with the Utah Tax Commission, and is instead taking the standard vendor collection discount as it begins collecting Utah’s state and local sales tax, but it is possible that more businesses will be willing to shoulder the burden of collecting sales tax in light of this huge financial incentive.

South Dakota has not enacted any statutory incentives for voluntary sales tax collection, so it has taken a different tack in encouraging sales tax compliance. The South Dakota Department of Revenue has been reaching out to individual merchants that make online sales into the state, and convincing them to register to collect South Dakota’s sales tax, despite a lack of physical presence. Gov. Dennis Daugaard announced earlier this year that these efforts have been successful in securing voluntary collection agreements with 100 online businesses in addition to Amazon.com.

In recent years, many states have attempted to enforce collection requirements on online retailers through legislation, some hoping that lawsuits would follow and lead to the Supreme Court overturning Quill. This process will take years, and the outcome is uncertain, especially in light of the upcoming confirmation battle over President Donald Trump’s Supreme Court nominee. In the meantime, however, states may be better off dangling a carrot in front of online retailers, in the form of financial incentives, rather than using a legislative stick to mandate compliance.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What incentives do you think would be effective in encouraging online retailers to collect sales tax?

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