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States pursue legislation requiring online retailers to collect taxes

The Marketplace Fairness Act, the federal bill requiring states to collect and remit sales and use taxes for remote sales, has been floating around in Congress in various iterations for 20 years, according to Bloomberg/BNA (Bloomberg). The Senate passed the most recent version in May 2013, but the bill went no further.

States are losing millions of tax revenue dollars, as we have pointed out in recent articles. For example, Colorado lost $352.6 million in sales and use taxes that went uncollected from customers of online and catalog retailers in 2012, while Indiana estimates that it lost e-commerce related sales taxes in the range of $39.6 million to $114.3 million for fiscal year 2012.

Bloomberg explains that 14 states have enacted “click through nexus laws,” which authorize them to tax out-of-state businesses if an in-state source refers customers to their websites. Though the constitutionality of these laws is unclear, as shown by the Colorado case Direct Marketing Association v. Brohl, states continue to take matters into their own hands. Bloomberg suggests that this puts out-of-state vendors in a precarious position: a failure to pay interstate taxes when required could be costly, but these companies are also vulnerable to class-action customer lawsuits for collecting sales tax when not mandated.

New York

In 2008, a tax law took effect that required sellers to collect and remit taxes on all sales made to customers in New York. In May of that year, The New York Times announced that Amazon.com had sued the state. The complaint alleged that the law, containing a “novel definition of what constitutes presence in the state,” violated the United States Constitution. Amazon was unsuccessful in its argument that it should not be forced to collect the tax on behalf of New York.

In Gov. Cuomo’s budget proposal for fiscal year 2015-16, the 2015 Opportunity Agenda, he proposed expanding the sales tax collection requirements for online marketplace providers when they “facilitate the sale.” Under the new legislation, a “person” who facilitates a sale is subject to the tax collection and a remittance requirement when it collects the monies paid by a customer, and provides the forum or means by which collections take place.

According to the National Review, the marketplace provider as the sale facilitator would be required to collect and remit the tax as if it were the vendor. Because there is no change to the nexus requirements in the new proposal, it appears that a marketplace provider would be subject to the requirements only if it has nexus with New York.

Illinois

In December, we wrote that Amazon.com will open its first warehouse in 2015, requiring it to collect sales taxes in Illinois.

In addition, Illinois enacted Public Act 98-1089, which requires other out-of-state retailers to collect use tax from online purchases. The original effective date was Jan. 1, 2015, but according to Bizjournals.com, that date was postponed a month. Thus, as of Feb. 1, 2015, not just online retailers like Amazon.com, but all other remote out-of-state retailers with annual gross receipts of more than $10,000 in sales to Illinois customers began to collect and remit the 6.25 percent tax. Examples of other remote out-of-state retailers are those that sell through catalogues, mail order, and home shopping channels.

Illinois’ informational bulletin sets forth the criteria that creates a rebuttable presumption that the out-of-state retailer is transacting business in Illinois and required to collect and remit the tax:

  • The out-of-state retailer has a contract with a person in Illinois;
  • Under the contract, the person in Illinois refers potential customers to the retailer and the retailer pays the person in Illinois a commission or other consideration based on the sale of tangible personal property by the retailer;
  • The person in Illinois provides to the potential customers a promotional code or other mechanism that allows the retailer to trace the purchases made by these customers; and
  • The retailer made cumulative gross sales of $10,000 during the preceding four quarterly periods to customers referred by persons located in Illinois, regardless of the location of the customers.

The seller can rebut the presumption by presenting proof to the Department of Revenue that “the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.”

Massachusetts: Congress passes 60-day tax amnesty bill

Massachusetts lawmakers have passed a tax amnesty bill, HB 52 to address the budget shortfall for the 2015 fiscal year. It will now go to Gov. Baker for signature.

During the amnesty period, the tax commissioner will waive all penalties, but not interest or amounts treated as interest, for the failure to comply with the following rules:

  • Timely filing any proper return for any tax type and for any tax period;
  • Filing proper returns which report the full amount of the taxpayer’s liability for any tax type and for any tax period;
  • Timely paying any tax liability; and
  • Paying the proper amount of any required estimated payment toward a tax liability.

The penalty waiver will be waived if:

  • The taxpayer files returns, makes payments as required, or otherwise comes into compliance with the tax laws pursuant to the amnesty program; and
  • For a taxpayer required to file annual reports with the Secretary of State, the taxpayer provides the tax commissioner with a certificate from the secretary, issued within 30 days of submission, indicating that the taxpayer is in good standing.

The amnesty program applies without requiring the taxpayer to show either reasonable cause or the absence of willful neglect. However, participating taxpayers waive the right to receive subsequent refunds or contest liability for amounts paid pursuant to the amnesty.

The deadline for paying tax liabilities in full is June 30, 2015.

The Somerville News Weekly reported that the amnesty plan is designed to help close the state’s $768 million budget deficit. Gov. Baker estimates that it will generate $18 million in revenue.

Other provisions to help close the budget gap include diverting $131 million in capital gains taxes scheduled to go to the state’s Rainy Day Fund, to the General Fund, and $40 million in transportation cuts, including $14 million to the Massachusetts Bay Transportation Authority.

South Carolina: Governor Haley proposes the biggest tax cut in state history

At the end of January, South Carolina Gov. Haley announced the Haley Tax Reform proposal, touted as a 10-year plan to cut taxes by $5.5 billion. The proposal contains three major components:

  1. Cut the state income tax rate from seven percent to five percent over the next decade, nearly a 30 percent reduction in state income taxes;
  2. Eliminate the legislatively elected transportation commission to “stop wasting our money;” and
  3. Increase the gas tax by 10 cents over the next three years and dedicate that money entirely toward improving roads.

Although her proposal involves increasing the gas tax, Gov. Haley insists that her reform is at no point a tax increase. She says, “it’s just the opposite,” and it can be inferred that the governor based this belief upon the projected net $5.5 billion reduction in taxes.

Income tax reduction

The governor proposes automatic income tax cuts of about $170 million per year to get to her ultimate goal of a five percent income tax. This would be paid for from the general fund, which has grown by almost $1.3 billion since 2009 or about $256 million each year. “What that means is that, if things continue as they have recently the tax cut will be paid for in its entirety—with money to spare.”

Gov. Haley adds that even if the state sees a repeat of economic disaster, “more than half our income tax cut will be paid for simply by not spending more money. And beyond that, we can all agree that our state government can use a little trimming if it means South Carolinians can keep more of their hard earned dollars.”

Gas tax reduction

Gov. Haley’s income tax reduction is a “swap” for an increase in the gas tax, so the two are a package deal. According to a 2014 Tax Foundation report, South Carolina’s current gas tax is only 16.75 cents per gallon, the third lowest in the country behind Alaska (12.4 cents per gallon) and New Jersey (14.5 cents per gallon). Gov. Haley points out that her state’s rate is quite a bit below neighboring states’ rates; the Tax Foundation reports that Georgia’s rate is 27.49 cents per gallon while North Carolina’s is 37.75 cents per gallon.

Gov. Haley’s gas tax allows South Carolina to remain competitive with adjacent states. In addition, the increase amounts to the “largest single investment in South Carolina’s roads and bridges in state history.” Her proposal refers to current estimates suggesting that South Carolina needs $1.3 billion over 10 years to merely stop the decline. The governor contends that her plan “funds that and much, much more, investing an additional $2.2 billion over the next decade for improvements above and beyond what we need to maintain our current condition.”

The end result

Ultimately, Gov. Haley’s proposal means that on average, “South Carolinians will see $689 every year in lower taxes. That’s a semester of books for a college student. Or two years of Internet service at home for a South Carolina family. Or a year of school lunches at a South Carolina public school. It’s real money.”

For additional information regarding these subjects, or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

David H. Godenswager, II
216.348.5444
dgodenswager@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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