Proposed federal legislation would modernize state sales tax collections in the growing age of e-commerce. The legislation would create fairer competition between businesses, and make it easier for states such as Minnesota to collect sales tax that is owed on out-of-state Internet and catalog purchases. According to National Conference of State Legislatures (NCSL), the legislation would help Minnesota collect approximately $455 million in FY 2012 sales tax revenue that it is owed, but under current law it would struggle to collect.
Massachusetts U.S. Rep. William Delahunt introduced H.R. 5660 or the Main Street Fairness Act on July 1. It allows states that meet certain tax code requirements to require remote retailers to collect the sales tax. The NCSL praised the legislation, saying: “This action will create a level playing field for all sellers, regardless if they are a brick-and-mortar retailer on Main Street or an online seller in another state.”
Items bought online or through mail-order catalogs are subject to sales tax. But unlike purchases from conventional retailers, these remote sellers are not required to collect the sales tax. Online retailers can get a 5 to10 percent price advantage over traditional retailers because they do not charge sales tax, said the Center on Budget and Policy Priorities, in its 2009 report: “Amazon’s arguments against collecting sales taxes do not withstand scrutiny.”
In Minnesota, individual buyers are supposed to pay their own sales tax on Internet or catalog purchases, if they buy more than $770 of taxable items in a calendar year. In FY 2010, Minnesota collected $58,956 from such payments, a drop in the bucket. People either don’t know they are supposed to pay, or simply don’t pay. As more and more commerce takes place on the Internet, Minnesota likely will lose more and more sales tax revenue if it has no effective way to collect it.
The proposed federal legislation would change current practice, which follows the 1992 U.S. Supreme Court ruling Quill v. North Dakota. North Dakota tried to get Quill, a mail order office supply retailer, to collect taxes on the $1 million worth of supplies it shipped to North Dakota buyers every year. The Supreme Court said the state couldn’t require a company to collect the tax unless the company had a physical presence or ”nexus” within the state, such as buildings or staff.
Much has changed since the Quill ruling; in 1992, e-commerce had not started. Further, two decades ago, states each had their own unique sales tax policies, making it difficult for multi-state companies to comply. But states have been working to make their sales tax policies more uniform. Under the proposed federal legislation, states could require remote retailers to collect sales tax, but only if they are part of the Streamlined Sales and Use Tax Agreement. Minnesota is a member. The agreement’s goal is to simplify and modernize sales tax administration across states. For instance, it makes sure states have uniform definitions for such things as “clothing” to make it easier for retailers to comply.
While action is taking place on the federal level, some states already enacted legislation to collect sales tax from Internet and catalog retailers. These are typically referred to as “Amazon laws.” New York passed an Amazon law in April 2008. “All states with sales taxes should give serious consideration to doing [similar laws],” said the Center on Budget and Policy Priorities in its report: New York’s ‘Amazon Law’: An important tool for collecting taxes owed on Internet purchases.
Modernizing Minnesota’s sales tax collections, and better compliance with existing laws, could generate approximately $900 million for the coming biennium. That’s about 16 percent of the projected $5.8 billion budget shortfall.
-Scott Russell
