A Taxing Situation

States Eye Your (Online) Shopping Cart

Gretta Spendlove

May 6, 2013

Do you check out a $1,500 camera at a Utah store and then buy it online to save sales tax? Do you, as a Utah business owner, know your customers are doing that? The online sales tax debate is a loud and feisty drama, with legislation and lawsuits as the past, pending and future acts.

Pending Legislation

The Utah Senate passed Senate Bill 226 during the last days of the 2013 legislative session. SB 226 was an “affiliate nexus” bill, designed to broaden the categories of remote sellers (mail order, catalog or online sellers) who must collect tax on sales to Utah residents. Legally, there must be “nexus” between a seller and purchaser’s state of residence before the seller can be forced to impose, collect, report and remit sales tax. SB 226 specified that even sellers who do not have a physical presence in Utah themselves could be forced to remit sales tax if they have “affiliates” or “related sellers” who have a physical presence in Utah.

The Senate vote was very close, 15–12, but the bill died when it did not receive House approval. Sen. Wayne Harper, who sponsored SB 226, argued that the bill would help Utah collect tax revenue that it is owed and help local Utah businesses that are losing out to internet sales. Sen.Todd Weiler, who opposed the bill, argued that a lawsuit over the constitutionality of SB 226 would follow its adoption, and that federal legislation on internet sales is nearly here.

On the National Front

The federal Marketplace Fairness Act was introduced in February in the U.S. Senate and House of Representatives. A test vote in the Senate showed bipartisan support for the Act, although there is no certainty when or if it will be enacted.

The Marketplace Fairness Act would grant states the authority to compel online and catalog retailers, no matter where they are located, to collect sales tax at the time of a sale to a resident in their state. It would create a level playing field, for sales tax purposes, for remote and brick-and-mortar sellers. However, before a state could compel a remote seller to pay sales tax, the state must simplify its laws to make multistate sales tax collection administratively less burdensome.

If the Marketplace Fairness Act is adopted, states must either adopt the Streamlined Sales and Use Tax Agreement before they impose sales tax collection responsibility on remote sellers, or simplify their sales tax laws in specified ways. Those changes include notifying sellers, in advance, of rate changes, and designating a single state organization to handle sales tax administration. Presently, there are up to 9,600 separate taxing jurisdictions. The Act also exempts retailers with less than $1 million in annual remote sales from collecting sales and use taxes for states where they do not have a physical location.

Legal Precedent

Use taxes are related to sales taxes. They tax “use, storage or other consumption,” within a state, of property which would have been subject to the sales tax if the purchase occurred within the state. For instance, if you live in Salt Lake City and buy a desk from Amazon without paying Utah sales tax, you may nevertheless owe Utah a “use” tax. In the past, most states have not aggressively enforced use tax laws on consumer purchases. In the future, more states may follow Utah in requiring reporting of use taxes on income tax forms.

Today’s disputes over online sales tax arise out of a 1967 US Supreme Court case, National Bellas Hess v. Illiniois Department of Revenue. In a 5-to-4 opinion, the Supreme Court held that a mail order company must have a “physical presence” in a state before the state can impose use taxes on the company or sales tax on its customers. The court cited the burden placed on sellers by “the many variations in rates of tax, in allowable exemptions, and in administrative and recordkeeping requirements.”

In 1992, in Quill Corp. v. North Dakota, the Supreme Court upheld the Bellas decision, but noted that “Congress remains free to disagree with our conclusions” and to resolve the issue under its Commerce Clause powers

The Marketplace Fairness Act’s requirement that states streamline their sales tax procedures is an attempt to make the collection of state sales taxes from remote sellers constitutional under the Bellas and Quill cases.

Several states, such as California and New York, have already adopted legislation, similar to Utah’s SB 226, which more broadly defines the nexus between a remote seller and the state. Courts already generally agree that a company that has an office or warehouse in a state has a “presence” there. More questionable are state laws that assert that a remote seller’s relationships with “related sellers” or “affiliates,” which have a presence in the state, such as online marketers, create a physical presence for the online remote seller.

So what is the next act for the online sales tax drama? Debate by Congress of the Marketplace Fairness Act, resolution of pending lawsuits challenging certain state sales tax statutes, and probably another online sales tax bill filed in Utah next year.

Gretta Spendlove is an attorney at Durham Jones & Pinegar.

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