Successfully Implementing Online Sales Tax: One Year After Wayfair
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ian Hutcheson
July 21, 2019
Since the June 2018 ruling of the U.S. Supreme Court in South Dakota vs. Wayfair, Inc., which established precedent for allowing state and local governments to tax online commerce, 42 states and Washington D.C. have introduced laws to tax online sales. Successfully implementing online sales and use tax for governments means capturing revenue that is proportional to the economic impact of online sales in a way that does not disincentivize this activity by being overly burdensome. Three ways governments can ensure successful implementation are to:
- Simplify the rules and procedures surrounding tax collection.
- Anticipate potential problems and address them in legislation.
- Examine the remittances of businesses to verify compliance.
Although these strategies are not an exhaustive inventory of all that governments can do, following them can put governments in a position to leverage the most from this seminal opportunity.
Sales Tax Nexus
Before being overturned by Wayfair, a 1992 Supreme Court ruling established that a business must have physical nexus within a government’s territory before its sales could be taxed. Nexus is defined by the Sales Tax Institute as, “The level of connection between a taxing jurisdiction such as a state and an entity such as [a] business.” With the rise of the internet and the massive impact that sales over it have on the economy today, an expanded conception of nexus became relevant.
The Wayfair decision opened the door for taxing authorities to recognize broader definitions of sales tax nexus that allow them to tax purchases made over the internet that have a direct impact on the consumers and businesses within their boundaries.
Simplify
The first way in which state and local governments can ensure compliance with these new laws is to simplify their design and procedures for collection. One pathway to simplification is through arrangements such as the Streamlined Sales and Use Tax Agreement (SST) and about half the states taxing internet sales are members of the SST. According to its, “State Guide to the Streamlined Sales Tax Project”, the SST simplifies the tax systems of its members by requiring them to standardize their rates and streamline their rules to make it easier for retailers to do business with them.
The Guide mentions the goal of, “Simplified and uniform tax returns and tax remittance procedures,” which echoes procedural simplifications undertaken in some states. Colorado’s General Assembly has deliberated creating a centralized virtual sales tax collection portal, which would lessen the burden of remittance for businesses and collection for governments. By simplifying the design of their tax systems and the procedures for enforcing them, governments can encourage compliance by businesses, which will help deliver the broader benefits that are expected from e-commerce taxes.
Anticipate
The second strategy for successfully implementing e-commerce tax is to anticipate likely problems through informed legislation. Currently, 22 states and Washington D.C. have enacted marketplace facilitator laws which require organizations like Amazon and eBay, which facilitate sales for third-party vendors, to remit taxes for these vendors to the taxing authority. Marketplace facilitator legislation anticipates the burden of having to collect tax from potentially millions of vendors and overcomes it by delegating this task to the facilitators best situated to tackle this undertaking.
Another anticipatory feature of e-commerce tax legislation is the threshold of gross sales or separate transactions that a vendor must make that would require tax remittance. The exact threshold varies across states, but all states have thresholds that anticipate the logistical and legal challenges posed by taxing every entity that conducts virtual sales. Marketplace facilitator laws and sales thresholds are specific examples of a broader effort by governments to anticipate the possible problems of implementing e-commerce tax and prevent them from sabotaging their new laws.
Examine
The third and final approach that governments can take to realize the benefits of taxing e-commerce is to examine the landscape of implementation to verify that the new laws are being accurately observed throughout the jurisdiction. The Oklahoma Tax Commission has developed a survey that is sent to online retailers which lists the various local sales tax jurisdictions across the state and asks businesses to apply the appropriate tax to an online purchase made within each area. The survey is then returned to retailers by the Commission with corrections made to any incorrectly assessed localities. Tools such as the Oklahoma Tax Commission’s survey are practical methods for examining implementation that allow governments to ensure that e-commerce taxes are working as intended.
The internet sales tax has spread rapidly to states across the United States. In the year following Wayfair, nearly every state has adopted legislation to capture revenue from what is a $600 billion segment of the retail market. Such hurried activity leaves little time for deliberation, but many states are practicing strategies which have ensured that their implementation efforts will be successful. State and local governments which simplify their legislation and the procedures for collection, anticipate potential issues and proactively address them and examine collections to corroborate accurate assessment are well-positioned to take advantage of this pivotal change in American tax law.
Author: Ian Hutcheson, MPA is a Management & Budget Analyst for the City of Oklahoma City and a member of the ASPA Oklahoma Chapter. He is a 2018 graduate of the Master of Public Administration program at the University of Kansas. Ian’s professional areas of interest include city management, finance and budget, economic development and urban design. Contact: [email protected].
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Successfully Implementing Online Sales Tax: One Year After Wayfair
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ian Hutcheson
July 21, 2019
Since the June 2018 ruling of the U.S. Supreme Court in South Dakota vs. Wayfair, Inc., which established precedent for allowing state and local governments to tax online commerce, 42 states and Washington D.C. have introduced laws to tax online sales. Successfully implementing online sales and use tax for governments means capturing revenue that is proportional to the economic impact of online sales in a way that does not disincentivize this activity by being overly burdensome. Three ways governments can ensure successful implementation are to:
Although these strategies are not an exhaustive inventory of all that governments can do, following them can put governments in a position to leverage the most from this seminal opportunity.
Sales Tax Nexus
Before being overturned by Wayfair, a 1992 Supreme Court ruling established that a business must have physical nexus within a government’s territory before its sales could be taxed. Nexus is defined by the Sales Tax Institute as, “The level of connection between a taxing jurisdiction such as a state and an entity such as [a] business.” With the rise of the internet and the massive impact that sales over it have on the economy today, an expanded conception of nexus became relevant.
The Wayfair decision opened the door for taxing authorities to recognize broader definitions of sales tax nexus that allow them to tax purchases made over the internet that have a direct impact on the consumers and businesses within their boundaries.
Simplify
The first way in which state and local governments can ensure compliance with these new laws is to simplify their design and procedures for collection. One pathway to simplification is through arrangements such as the Streamlined Sales and Use Tax Agreement (SST) and about half the states taxing internet sales are members of the SST. According to its, “State Guide to the Streamlined Sales Tax Project”, the SST simplifies the tax systems of its members by requiring them to standardize their rates and streamline their rules to make it easier for retailers to do business with them.
The Guide mentions the goal of, “Simplified and uniform tax returns and tax remittance procedures,” which echoes procedural simplifications undertaken in some states. Colorado’s General Assembly has deliberated creating a centralized virtual sales tax collection portal, which would lessen the burden of remittance for businesses and collection for governments. By simplifying the design of their tax systems and the procedures for enforcing them, governments can encourage compliance by businesses, which will help deliver the broader benefits that are expected from e-commerce taxes.
Anticipate
The second strategy for successfully implementing e-commerce tax is to anticipate likely problems through informed legislation. Currently, 22 states and Washington D.C. have enacted marketplace facilitator laws which require organizations like Amazon and eBay, which facilitate sales for third-party vendors, to remit taxes for these vendors to the taxing authority. Marketplace facilitator legislation anticipates the burden of having to collect tax from potentially millions of vendors and overcomes it by delegating this task to the facilitators best situated to tackle this undertaking.
Another anticipatory feature of e-commerce tax legislation is the threshold of gross sales or separate transactions that a vendor must make that would require tax remittance. The exact threshold varies across states, but all states have thresholds that anticipate the logistical and legal challenges posed by taxing every entity that conducts virtual sales. Marketplace facilitator laws and sales thresholds are specific examples of a broader effort by governments to anticipate the possible problems of implementing e-commerce tax and prevent them from sabotaging their new laws.
Examine
The third and final approach that governments can take to realize the benefits of taxing e-commerce is to examine the landscape of implementation to verify that the new laws are being accurately observed throughout the jurisdiction. The Oklahoma Tax Commission has developed a survey that is sent to online retailers which lists the various local sales tax jurisdictions across the state and asks businesses to apply the appropriate tax to an online purchase made within each area. The survey is then returned to retailers by the Commission with corrections made to any incorrectly assessed localities. Tools such as the Oklahoma Tax Commission’s survey are practical methods for examining implementation that allow governments to ensure that e-commerce taxes are working as intended.
The internet sales tax has spread rapidly to states across the United States. In the year following Wayfair, nearly every state has adopted legislation to capture revenue from what is a $600 billion segment of the retail market. Such hurried activity leaves little time for deliberation, but many states are practicing strategies which have ensured that their implementation efforts will be successful. State and local governments which simplify their legislation and the procedures for collection, anticipate potential issues and proactively address them and examine collections to corroborate accurate assessment are well-positioned to take advantage of this pivotal change in American tax law.
Author: Ian Hutcheson, MPA is a Management & Budget Analyst for the City of Oklahoma City and a member of the ASPA Oklahoma Chapter. He is a 2018 graduate of the Master of Public Administration program at the University of Kansas. Ian’s professional areas of interest include city management, finance and budget, economic development and urban design. Contact: [email protected].
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