The U.S. Supreme Court freed states and local governments to start collecting billions of dollars in new sales taxes from online retailers, overturning a ruling that had made much of the internet a tax-free zone and put traditional retailers at a disadvantage.
News of the ruling caused shares of Internet retailers including Amazon.com Inc. and Wayfair Inc. to fall.
The court’s 1992 decision involving catalog sales had shielded retailers from tax-collection duties if they didn’t have a physical presence in a state. Writing for the 5-4 court Thursday, Justice Anthony Kennedy said that ruling was obsolete in the e-commerce era.
The sticker price not being the actual price you pay at the register is one of those things that always baffles and annoys me whenever I’m visiting the US. It seems odd to me that physical retailers have to charge tax, but online retailers don’t. Seems like an odd loophole that needed fixing.
Sales taxes are not charged, they are collected. I knows it seems like a distinction without a difference, but its not. Its the fundamental thing that makes it distinct from a VAT. Retailers don’t “pay” sales taxes at all, so they don’t really “charge” for them either. They are simply responsible for collecting them on behalf of the state and local government.
http://www.economywatch.com/business-and-economy/difference-between…
Which is basically why it was never collected before for internet purchases. If it were a VAT, it would have been built into the entire supply chain. But it is only applied to consumers on final retail sales, and only by state and local governments (the US has no federal sales tax or VAT currently).
For the first 20 years or so of the internet there was no good way to enforce the collection of sales tax (because States and local governments could not force retailers outside of their jurisdiction to collect them).
Its not a new tax either… Technically, everyone in the US was supposed to pay their local sales taxes on all internet purchases, but since the system was traditionally built on relying on retailers to collect it, it was not enforceable and thus conveniently ignored by everyone (your were supposed to declare those purchases yourself on your tax returns). It was also a bit murky legally, should you pay your local tax when you buy from an out of state retailer, or should you pay the tax imposed by the state they operated in?
This basically “fixes” that, in the worst way possible, with a court decision. This should have been addressed by Congress one way or another at least a decade ago, but our Congress basically doesn’t do their job…
galvanash,
Most of us in the US already know this, but since there are many international readers, it’s worth pointing out that online retailers in the US have always charged sales taxes, but only for transactions that occur in states where they have a physical presence. The court ruling in the 90s was based on the logic that businesses can’t be taxed by states where they have no physical presence. This is how the whole “no sales tax on online purchases” came about.
While this clearly creates a loophole, they had a valid point: doing taxes for 50 states plus any local governments taxes would crush most businesses and halt interstate commerce. Maybe big retailers could afford it, but it would be virtually impossible for small sellers to comply and they would be forced to reject purchases from buyers in other states due to no fault of their own. The tax accounting overhead would put many out of business.
I think it would be far more practical to charge sales taxes based on where products are bought from rather than where they’re shipping to, but for better or for worse that’s not how it works and the result is a big convoluted mess even for those who want to go by the book
This is what I meant about Congress failing to act. We have a tax system that is obviously ill equipped to deal with the changing internet landscape for the last 25 years, and no one did anything about it.
Now this ruling means that even though the system is still absolutely horrible and a disaster for retailers to comply with, that will have to comply anyway… I think the court is right, internet trade should not be exempt from state and local taxes, but the federal government could have setup some kind of proxy system to collect these taxes and set a unified rate so that retailers would only have to deal with one system instead of 50…
galvanash,
It’s easy to agree with you on principal, but in practical terms how is congress supposed to address what amounts to state tax disputes? I can think of a couple solutions that could work at the federal level by scrubbing state sales taxes in favor of federal ones, but the federal government doesn’t deal with sales taxes. From their perspective, it’s not congress’ job to deal with state tax issues.
Hypothetically congress could declare a universal sales tax for all interstate commerce. This would certainly help many small businesses that would otherwise struggle to comply with so many different tax codes, but I don’t think it would have much chance of passing in congress.
It doesn’t need to be a federal tax, it just needs to be a uniform rate. They also need to define a uniform policy for how nexus (https://bit.ly/2tsoTsR) is established with each state. The current “if your brother’s cousin’s sister ever visited the state” rules established by some states are absolutely stupid. The federal government is empowered by the constitution to regulate interstate commerce, this seems like a perfect example of interstate commerce to me.
Regulating doesn’t mean replacing state and local taxes with federal ones, they simply needed to act in the best interest of everyone and realize that the existing system was a relic from a gone era, and setup something less onerous on retailers.
I’m fine with States doing whatever they want with retailers operating with nexus in their states (as they do now and as long as nexus is reasonably defined). Its the transactions that occur across state lines that need to be legislated by Congress – retailers should not be subject to the whims of 50 states and over 10k localities throughout the country just to do interstate business, its idiotic. I’m fine with a tax, but it needs to be simple and uniform.
The current system across the whole country requires retailers to register with every state they have nexus in. Does nexus even matter anymore? Does every online retailer in the country need to register with all 50 US states? How do they expect to be able to even handle all this shit at the state level? The paperwork mountain will be extraordinary…
You may as well just sell your shit through Amazon or Ebay now, as dealing with this yourself as a small retailer is basically impossible to be honest. Its ludicrous.
ps. As an aside, I have worked for companies doing business with Amazon Web Services for the last 10 years or so. Until like 2 or 3 years ago, the only way to meet up with an actual sales rep or engineer (or any employee) in person was to go to Seattle, because they wouldn’t let their employees set foot out of state, because in some states it established nexus for their online storefronts, an entirely separate business operation. That is what I’m talking about when I say stupid. Amazon gave up and basically decided to establish nexus with pretty much everyone and just collect the taxes across the board, but that certainly doesn’t seem like the best way to solve the problem to me…
Edited 2018-06-22 04:57 UTC
galvanash,
It would be far more optimal if we had both a uniform rate and a consolidated sales tax distribution scheme so that companies don’t have to deal with paying so many different treasury departments. Ideally businesses could pay all the sales taxes via their local treasury who could then aggregated and forward payments as a lump sum to other treasuries. Otherwise you are right, the amount of paperwork and checks will be extraordinary.
Hah, no… you have a tax system that’s obviously ill equipped to deal with *anything*.
As a developer writing software in that area, I can quite confidently say that the only thing the US tax system achieves is to make money for those working in the tax system… lawyers, accountants, politicians (and the people writing software to help them manage it).
Although, nowadays, managing updated sales tax tables could at least be done reasonably.
Managing the payments, OTOH… if you have a sales tax processing company would be one thing, otherwise you’d have a problem. (Arguably, this is something where a federal agency could and should step in, to act as a sales tax processor for interstate commerce…)
In the USA there is no federal sales tax. We have a state sales tax, a county sales tax, and a city sales tax. In my county alone there are 76 taxing authorities.
As for taxing where the product is sold, not consumed, this will only make small communities lose out on tax revenue.
Just a mess, no matter how you look at it.
alphaseinor,
Indeed.
Here’s a real scenario I’ve encountered many times. I live in NY, and often times make online purchases from places like NJ and have them shipped to family living in CA. I can say that in practice I’d be charged a CA sales tax because the merchant uses the delivery address for sales tax purposes, not my billing address nor my physical location.
But I don’t know what’s supposed to happen under this scenario?
No, it’s not. You just pay the State sales tax on the order when you place it just like if you bought it from a local department store.
Are people like you really this clueless?
Yoko_T,
Please don’t be rude. It’s more complex than you are suggesting and maybe even realize.
For starters, everything can change from one jurisdiction to the next. If I head over to the next county, I have no idea what their sales taxes are because the local governments can impose their own taxes. Consider heating oil.
http://resources.heatingoilexpress.com/heating-oil-prices/residenti…
Sometimes it even varies throughout the year, around here they reduce taxes on clothing every year. but unless you are really on top of things you wouldn’t know it. Some jurisdictions charge different rates depending on the products. Milk and bread and underwear might not be taxed at the same rate as detergent and pencils and shoes are. Sometimes receipts will have different tax lines. The sales taxes on gasoline work very differently from other kinds of sales taxes. A friend who worked at a restaurant told me that they had to charge different sales taxes depending on if the customers dined in or went through the drive through. There’s no rhyme or reason for it other than local government officials who thought it would be a good idea. If you get a chance, look at an ecommerce database, every item that a merchant sells needs to be associated with a tax classification since they may not all be under the same schedule.
Fortunately most consumers can just leave it to the merchants who ought to know how to do it right. But the sales tax situation can be extremely confusing for individuals and small shops buying/selling services, it’s easy to get it wrong without realizing it. Take photography or a DJ for example.
https://photographyspark.com/photographer-sales-tax-guide/
Unless you work in accounting and complexity helps your job security, I don’t think we can say any of this is easy. It’s a burden that many small companies are going to struggle with even more as they as subjected to more interstate taxation jurisdictions.
Someone’s clueless, but it’s not him. The situation is exactly as he describes it – when you buy something, the taxes can be applied at any combination of city / county / state / federal levels, the exact taxes varying wildly.
This is actually something that we have to factor into hardware sizings for our clients – for a similar volume of customers, the US tax complexity essentially means that customer bills require significantly more CPU to calculate and more disk for storage, compared to countries with a flat X% nation-wide sales tax.
I can’t wait to find out just how confused this is going to get, especially with cross-state businesses. Do you pay the state tax where the business is established? The nearest warehouse? How about the rate of the place you’re shipping the item instead? All of the above? Only some of them? It’s all good to say you pay where the item is sold not consumed but what, in practice, does that mean for online retailers? In the case of Amazon, for example, it’ll destroy their business if everyone ordering from them is subject to Seattle’s 9% (or more) tax rate. This is a cluster waiting to happen.
Moron. You pay the going tax rate of the state which is determined by the address to where the order is being shipped to.
There’s nothing confusing whatsoever about it.
I read an article that stated if you tracked all localities in the US (of which there are about 10k), the tax rate for at least one of them changes nearly every day of the year…
Yes, this ruling concerned states taxes, but localities are going to jump all over this too, because every argument you can use for states applied to them as well. Companies like Amazon are already collecting local taxes in some cities…
Yeah, not gonna be confusing at all. Sorry, but there is a reason Amazon fought tooth and nail for almost 10 years to avoid nexus outside of Washington for most of their business… Because it costs a metric f*ckton of money to manage the mess.
Edited 2018-06-23 17:30 UTC
And just the basic sales taxes. In some jurisdictions, you’ve also got additional taxes on specific types of product – notably alcohol, tobacco, etc – which may or may not be charged in the same way as a sales tax, and which might be charged by any of the different levels. And don’t get me started on the countless rules around exemptions…
More nonsense. Your local taxes are for specific things like taxes on property sales,restaurant,ect,ect,ect which should be taxed as if they done locally and hopfully will be done in the future.
Eh, the sticker price not being the actual price also happens here in the Netherlands, Thom. Centralpoint.nl and the Dutch Microsoft Store, for example, both add the tax later on in the process. Now the MS Store has American ties, so that’s kind of understandable, but Centralpoint is a well-known Dutch retailer from Amstelveen, so… And I also see it happening at bol.com with some products by various retailers. So it’s not just an American thing (anymore).
I imagine in changes somewhat over time. Since the mid 80’s, New Zealand has a flat sales tax (currently 15%) applied to pretty much everything, and these days, it’s very rare to see tax-exclusive prices. But for a long time, small stuff was all inclusive, but larger items (home appliances, etc) were often advertised with the exclusive price, “$XYZ + GST”.