Did you know when you buy a book or other taxable item from an out-of-state vendor, the state requires you to send in the tax you owe?
If you didn’t know…or didn’t pay it…you’re not alone.
With the exponential growth of online sales over the past decade, states across the country have lost billions of dollars in uncollected sales taxes — an estimated $23 billion in 2012 according to Streamline Sales Tax, a Nashville-based advocacy group.
That’s why states including Pennsylvania are working to capture those unpaid sales and use taxes — primarily from Internet, catalog and telephone sales.
“The Department of Revenue has authority under existing law to enforce the collection of sales tax by companies with nexus in Pennsylvania,” says Maia Warren, information specialist with the Pennsylvania Dept. of Revenue. “We are just enforcing a law that’s been on the books for years. The law hasn’t changed, the retail environment has changed. The department’s goal is to treat all businesses, both e-commerce companies and brick-and-mortar retailers, the same under Pennsylvania’s current tax laws.”
The sales tax applies to consumer transactions with online businesses with a “physical presence” — or nexus — in Pennsylvania. A physical presence includes distribution centers, staff or delivery trucks that come into the state and those who advertise with in-state entities using sales- or clicked-based compensation methods.
According to Warren, the state anticipates collecting an additional $42.8 million between Sept. 1 and Jun. 30 for fiscal year 2012-13.
Pennsylvania is not alone. Across the nation, 45 states have the same struggles trying to collect taxes incurred from out-of-states sales to consumers within their borders. That’s why some observers believe federal intervention is the only solution to combat issues of fairness and simplification of collection.
The issues: Is it fair for online vendors not to have to collect taxes while bricks-and-mortar vendors must? If not, how can vendors simply charge, track and remit the appropriate taxes with 45 states and nearly 7600 taxing jurisdictions across the country?
“It’s a very complex and difficult issue,” says Michael Barletta, co-owner and store manager for Cigar Box, with stores in Hazleton, Frackville and St. Clair as well as online sales. “I guess if it was really cut-and-dry, they would have a solution to it at this point. I think that the problem begins with the fact that each state has a different sales tax percentage. And for us, being in the tobacco industry, every state has a different tobacco tax.”
Barletta doesn’t have an opinion whether or not collection of remote sales taxes would be worth the effort, but another Schuylkill County retailer does.
“I think it’s worth the extra aggravation to put the sales tax into the order,” says Debbie Altobelli, tour director at Pottsville’s Yuengling Brewery.
D.G. Yuengling & Son Inc. has a gift shop at its Pottsville facility that sells to walk-in customers as well as online. “It doesn’t seem fair that someone has to pay taxes and other people don’t.”
The issue is not new. The U.S. Supreme Court refused to impose collections on out-of-state customers in 1967.
In a 1992 decision in Quill Corp. v. North Dakota, it reiterated its previous ruling and reminded Congress it has the power to create a level playing field for local merchants.
“In the Quill decision in 1992 … they said that Congress could get these laws simplified and, if that were the case, then the states could collect those taxes because it’s really a Commerce Clause issue,” says Rachelle Bernstein, vice president and tax counsel for the National Retail Federation, Washington, D.C. “But until there was simplification, a state could not collect from a remote seller that had no physical presence in the state. So now many states are looking for ways to be able to collect that tax.”
Bernstein believes federal involvement is the only solution to collect those taxes.
Two bills currently pending — Marketplace Fairness Act (S.1832) and Marketplace Equity Act (HR 3179) — have bipartisan support. The bills would authorize all states to require online retailers with a minimum amount in annual sales to collect sales taxes provided states simplify their tax procedures and certify tax collection software for use by Internet companies.
If either of these bills becomes law, remote sellers will be required to collect sales taxes, creating a level playing field with bricks-and-mortar retailers who already have been collecting those taxes.
“For years this issue has been going on,” says Bernstein. “It’s just grown to very large proportions with the growth of the Internet. Our members want us to support legislation that’s fair, and fair means that everybody is subject to the same rules. They support leveling the playing field but also making sure that the compliance is simple.”
The National Retail Federation (NRF) supports federal legislation that would require states to provide software to make it as easy as possible for retailers to collect. But not everyone agrees.
“One of the problems that we’ve been seeing, in particular with the Pennsylvania ruling, is it actually goes further than any other state ruling that we have seen thus far,” says Carl Szabo, policy counsel at NetChoice, a Washington D.C.-based coalition of e-commerce companies.“It’s not just going to affect companies that sell online, but it’s also going to discourage retailers from running ads in online newspapers, even print ads and even ads run on television. Unfortunately, some in the Dept. of Revenue have been making conflicting statements that would suggest even pay-per-click would create nexus.”
Szabo sees a great deal of confusion with the state’s lack of clarity.
“We are continuing to try and work with the Dept. of Revenue in Pennsylvania and trying to get added clarity and trying to make sure that Pennsylvania doesn’t end up passing a revenue ruling that’s going to cause more pain than it’s worth,” says Szabo. “One of our concerns is we don’t want to saddle these new online sellers with an incredibly complex tax bureaucracy. One of the things we are looking to prevent is something like having a state audit from 45 different states.”
Simplifying the process represents a primary focus for both the business community as well as government.
“It’s not the business that owes the sales tax; it’s the consumer that owes the sales tax. What the states are asking is that the remote retailers be their tax collectors,” says Bill McClellan, vice president of government affairs for the Electronic Retailing Association (ERA), Washington, D.C.“What they are asking the businesses to do is to collect that for them. The debate on our end is, ‘OK, if you want us to collect sales tax, make it fair and make it easy to do.’”
McClellan doesn’t believe it’s fair to put the same burdens on a mom-and-pop online retailer as those put on large retailers such as Walmart.com.
The ERA is opposed to any legislation until a fair and simplified solution addresses that and other concerns such as dispute resolution processes.
To date, a coalition comprised of 24 states has signed up with the Streamlined Sales Tax and Use Agreement, a possible baseline foundation for creating simplicity, uniformity of definitions, audits and other issues surrounding the collection of sales taxes nationwide.
If you’re shopping for an online deal without sales tax, better do it soon.