Marketplace Fairness

Update: April 2019

By NAMM Policy Counsel, Jim Goldberg

The California remote-sales tax collection law, similar to laws in many other states, illustrates the problem that many brick-and-mortar retailers are facing in the wake of the Supreme Court's 2018 decision in the Wayfair case. Unless a retailer has a robust internet sales presence, navigating the changing landscape is going to be challenging.

Not all states have adopted "economic nexus" rules (see the chart on the NAMM web page for this issue) and, for the ones that have expanded their remote sales tax collection requirements, not all of the rules are the same. Most, if not all of these states, and the ones which will surely follow in the next few years, have small business exemptions, which exclude those whose contact with the state falls below certain thresholds, usually expressed as either a specific number of transactions or a specific volume of transactions within the current or previous calendar year, e.g.., 200 transactions or $250,000 worth of sales.

Just as Congress failed to act to authorize remote sales tax collection, most believe there is a zero chance that Congress will step in and standardize the rules among the states now that the Supreme Court has acted.

Ultimately, it's up to retailers with internet or other remote sales business as part of their brick-and-mortar operation to generally familiarize themselves with the minimum contacts requirement for each of the states. for more information, visit the Federation of Tax Administrators website: Remote Seller Info State-by-State Note: this information will continue to change as more states adopt or modify their laws.

Of course, the rules requiting tax collection when one has a physical presence (e.g., stores or road reps visiting a state) remain in place.

3/14/19: States Enforcing Remote Sales Tax Collection

Source: Politico Pro Datapoint, National Conference of State Legislatures, CA Dept. of Tax and Fee Administration

March 14, 2019: A June 2018 Supreme Court decision in South Dakota v. Wayfair eliminated a requirement that businesses must have a physical, brick-and-mortar presence or “nexus,” such as a warehouse, distribution center or storefront, located in a state in order to be subject to sales tax collection. As a result, more than half of the U.S. now has legislation in place that allows for the collection of sales tax from out-of-state internet retailers, also called remote sellers. On April 1, California will join 28 states and the District of Columbia enforcing collection of remote sales tax. View an infographic. 

August 2018

ONLINE SALES TAX VICTORY

by Alan Friedman, Music Inc.

In case you didn’t hear the big news, in June 2018 the U.S. Supreme Court ruled 5 to 4 in favor of allowing states to collect sales tax from online retailers that have an “economic interest” in their states. The decision overturns the longstanding 1992 Quill Corp. vs. North Dakota ruling, which found a state could not require out-of-state retailers to collect sales tax if they had no physical presence in that particular state. This new law now paves the way for all states to start collecting huge revenue lost under the old law, or more accurately, lost due to a state’s inability to police the sales tax that should have been collected from out-of-state customers. In short, high sales tax states and cities can now force all online retailers to collect state and city sales tax on purchases made by residents that previously escaped sales tax.

TAX LAWS MISUNDERSTOOD

What many out-of-state customers have misunderstood for years is that purchases from a retailer with no physical presence in that customer’s state were truly free of any sales tax. Yes, a retailer without a physical presence in a particular state did not have to collect sales tax from an out-of-state customer. But the out-of-state customer, whether online or mail order, was technically supposed to pay the sales tax (also called a “use tax”) directly to their home state if a retailer did not collect it. Most taxpayers never paid it either because of their ignorance of the law or because they knew their state lacked the mechanism to track and collect sales tax on their out-of-state purchase. Whether inadvertent or purposeful, this tax cheating cost states billions of dollars in revenue each year.

REVENUE LOST AND NOW WON

States were losing an estimated $8–33 billion in annual revenue under the old law, according to the ruling opinion written by former Justice Anthony Kennedy. While mail-order sales totaled around $180 billion in 1992, online sales account for approximately $450 billion with mail-order revenues pushing that figure past a half-trillion dollars, according to the ruling. “Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” Kennedy wrote. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”

There are some online retailers who were already collecting at least some state sales tax. Amazon collects tax on items it sells directly, but an estimated 52 percent of its sales come from third-party vendors who were not required to collect and remit the tax. But many large online companies never collected the sales tax, relying on their lack of a physical presence. In 2016, South Dakota passed a law compelling out-of-state online retailers to collect sales taxes and followed up by suing several large merchants (like Overstock, Wayfair and Newegg) to show they were serious. The U.S. Supreme Court ruling now gives states the right to collect the sales tax revenue they’ve been missing. States like South Dakota and Tennessee, which have no state income tax and rely heavily on sales tax, stand to gain the most from the new ruling.

But these new sales tax laws won’t come without a fair amount of tax reporting pain, especially for the smaller retailer. In a dissenting opinion from Chief Justice John Roberts, he wrote, “Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers.” Perhaps point-of-sale software companies and sales tax-tracking app developers will benefit from new sales tax collection and reporting compliance.

THE LAW’S IMPACT ON ALL RETAILERS

We’ve all seen online retailers win the pocketbooks of consumers, which now leads to: What impact will this new ruling have on online and brick-and-mortar retailers alike? In his opinion, Justice Kennedy said times have changed to such a degree that online retailers no longer qualify for “an arbitrary advantage over their competitors who collect state sales taxes” by claiming they don’t have a physical presence in a state.

“The internet’s prevalence and power have changed the dynamics of the national economy,” Justice Kennedy wrote. There’s no arguing retailing has been transformed by the internet. In 1992, less than 2 percent of Americans had internet access, compared to about 89 percent today. Many brick-and-mortar retailers have seen their businesses crippled or even destroyed by the rise of e-commerce. So, it’s no surprise brick-and-mortar retailers feel vindicated by the Supreme Court’s decision and view it as a leveling of the retail playing field.

“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, National Retail Federation President and CEO. “The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well. This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

Frankly, many online sellers have grown so big they no longer care about the break they’ve gotten on collecting sales tax. Even with Amazon, which has been speedily building its own fast delivery network and expanding into physical retail by acquiring Whole Foods and opening Amazon Go and Amazon Books, the ruling will likely have little impact because they already collect sales tax on first-party sales in the 45 states that impose a sales tax.

But there is an unresolved “wait and see” issue. More than half of the units sold on Amazon worldwide last year came from third-party sellers, many of which are small and medium-sized merchants. Amazon’s statement on this is: “We’re not opposed to collecting sales tax within a system that’s both simple and applied evenhandedly.” Companies like eBay have asked Congress to intervene and set up some sort of tax rules to protect the merchants selling on their platform.

NO ONE LEFT TO BLAME

Online retailers, especially the bigger ones, can no longer rely on having a tax edge that has undoubtedly given them a price differential advantage over brick-and-mortar retailers. As for brick-and-mortar retailers, with a level playing field comes the harsh reality of owning up to any failure for not giving customers a good enough reason to come visit and buy.

Alan Friedman, CPA, provides accounting and financial services to music industry clients. He is a frequent speaker at NAMM U seminars and can be reached at 860-677-9191 or alan@fkco.com. Visit his website, fkco.com.

2020 NAMM Show Policy Forum

Industry experts provide industry-specific policy updates on revised CITES permit requirements, remote sales tax, Prop 65, Chinese tariffs and NAMM Fly-In plans. Moderated by Mary Luehrsen, Director, Public Affairs and Government Relations, NAMM. Panelists: Jim Goldberg, Managing Partner, Goldberg & Associates, PLLC; Heather Noonan, Vice President for Advocacy, League of American Orchestras; Chris Cushing, Managing Director, Federal Strategies, Nelson Mullins Riley & Scarborough; and Leo Coco, Managing Director, Education Policy, Nelson Mullins Riley & Scarborough.

Watch the Recorded Forum

Timestamp / Segment

• :01 Welcome and Overview
• :55 CITES
• 10:40 Prop 65
• 23:55 E-Commerce
• 33:33 Tariffs
• 43:54 Music Education