For decades, states that impose sales and use tax have sought ways to get out-of-state (remote) vendors to collect sales tax rather than rely on consumers to self-assess use tax. A major obstacle to this goal is a 1992 Supreme Court decision (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)), in which the Court held that a state may impose sales tax collection obligations on a vendor only if the vendor has a physical presence in the state.
Efforts by states to overcome the Quill decision include:
• Convincing Congress to exercise its Commerce Clause authority and overturn the Quill decision, while perhaps exempting small vendors. Legislation has been introduced many times since 1992. Most recently, on May 6, 2013, the Senate passed S. 743, the Marketplace Fairness Act (MFA). More than 20 states have aimed to address the Court’s concern that different sales tax rules in each state make compliance too complex for vendors by making sales tax rules more consistent among states via the Streamlined Sales and Use Tax Agreement (SSUTA). These states hope that Congress will allow them to collect from remote vendors.
• Broadening sales tax nexus by finding ways remote vendors might have a physical presence due to a related party or affiliate in the state. (For more information, see the author’s “affiliate nexus” website.)
• Requiring remote vendors to help the state educate consumers and to find consumers who owe use tax. A few states, including Colorado and South Dakota, enacted notice laws that require certain remote vendors to provide buyers information about the use tax. Colorado also required vendors with sales over a certain threshold to report sales to buyers and the state.
• Enticing vendors to collect by offering some type of benefit. For example, in 2012, Tennessee enacted legislation (Tenn. Code §67-6-5) to delay sales tax collection for vendors making a capital investment of at least $350 million and creating at least 3,500 jobs. Similar actions were taken in South Carolina (2011 S.C. Act No. 32) and Texas. Missouri requires vendors that have contracts with the state to be registered for sales tax (Missouri Department of Revenue website).
Recent developments in three states (Colorado, Missouri, and Utah) and many states’ strong desire to more easily collect sales and use taxes illustrate the logistical and legal challenges that states, as well as some vendors, face.
Colorado: Vendors, report your buyers!
In 2010, Colorado enacted a law requiring certain remote vendors to report information to purchasers and the state revenue department (Colo. H.B. 1193 and Department of Revenue’s Consumer Use Tax webpage). Vendors with over $100,000 of sales to Colorado customers must notify customers about possible use tax obligations. In addition, a report must be given to customers who make over $500 of annual purchases. Finally, vendors must provide the state with an annual report with buyers’ names, addresses, and purchase amounts. Penalties apply for noncompliance.
The Direct Marketing Association (DMA) challenged the law and obtained an injunction preventing its implementation (Direct Marketing Ass’n v. Huber, No. 1:10-CV-01546-REB-CBS (D. Colo. 3/30/12)). The district court noted the reasons the law discriminated against interstate commerce, one of which was that the state had other options to collect use tax from Colorado residents (such as a line on the state income tax form). However, in August 2013, the Tenth Circuit Court of Appeals ruled that under the Tax Injunction Act (28 U.S.C. §1341), the federal district court lacked jurisdiction to issue the injunction (Direct Marketing Ass’n v. Brohl, No. 12-1175 (10th Cir. 8/20/13)).The case was remanded to the district court to dismiss the DMA’s Commerce Clause challenge.
It is not yet clear what will happen next in Colorado. If the state pursues enforcement of the 2010 legislation, remote vendors would have to comply, opt instead to collect sales tax, or pay the penalties. The appellate court noted that remote vendors that opt to collect or pay penalties could then seek a refund. If a refund is denied, the vendor could seek a remedy in state court.
Will the Colorado legislature repeal or amend the 2010 law? If not, when will the Department of Revenue require vendors to comply with it? Stay tuned for word from the Colorado legislature and revenue department.
Missouri: Use tax oddities and Marketplace Fairness: What’s a legislature to do?
Missouri’s use tax laws are not burdensome for consumers. Consumers must file a use tax return if total purchases subject to use tax exceed $2,000 during the year. Once that threshold is exceeded, use tax is due on all taxable purchases (Mo. Code Regs. tit. 12, §10-103.250(2)(B); see Missouri Department of Revenue website).
Under this system, if more vendors become sales tax collectors, which could occur if the MFA is enacted, Missourians will pay more sales tax. To provide some relief, Mo. H.B. 253 included a provision to lower income tax rates by 0.5% if the MFA is enacted. The legislature passed this bill, but it was vetoed by Gov. Jay Nixon in June. One of the governor’s concerns was that MFA enactment would not automatically increase sales tax collections, because the state would still need to amend its sales tax laws before it could adopt the MFA (see the governor’s veto memo (6/5/13)).
Minnesota has a similar system of exempting a certain amount of sales from use tax, except it is only for up to $770 of goods annually (Minn. Stat. §297A.67; see Minnesota Department of Revenue website).
Utah: Attention remote vendors: We’ll pay you!
In March 2013, Utah enacted legislation (Utah H.B. 300) to entice remote vendors to voluntarily register to collect sales tax from Utah customers. Starting in 2014, remote sellers that volunteer to collect sales tax are allowed to keep 18% of the tax collected (the original proposal was 50%) (Utah Code §59-12-108(5)(a)). Utah law already allows vendors subject to Utah sales tax collection and monthly filing to retain 1.31% of the remittance amount (Utah Code §59-12-108; see Utah State Tax Commission website).
Utah legislators appear optimistic about the new rule’s effectiveness. They estimate it will generate $30.7 million for the state and $13.1 million for local governments in FY 2014.
While compensating vendors with 18% of the sales tax collected may sound generous, it applies only to remote vendors that, under the Quill decision, do not have an obligation to collect the sales tax. The effectiveness of this approach to collect tax in Utah also depends upon the following:
Constitutionality: Is there a Commerce Clause problem with providing a greater benefit to out-of-state businesses relative to in-state businesses? Usually, these problems involve the opposite question—laws that benefit in-state businesses by burdening out-of-state businesses (see, e.g., West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994)).
Cost/benefit: Remote vendors must determine whether the 18% discount is a sufficient benefit to become a Utah sales tax collector. They also risk scrutiny that they might actually have sales tax nexus, in which case they would be entitled to only a 1.31% discount (for monthly filings).
Consumer use tax enforcement: Utah consumers may pay their use tax on state income tax Form TC-40 (see page 9 of the 2012 instructions). If state enforcement is strong, consumers may prefer to have vendors collect sales tax rather than maintain records of use tax owed. If enforcement is weak, vendors may be inclined not to voluntarily register and collect.
Reality check: Why continue to allow in-state vendors a 1.31% discount? In his FY 2011 budget recommendations, Gov. Gary Herbert proposed eliminating the vendor discount. The budget report explains that the discount began in 1992 to help compensate for the new burden of monthly sales tax reporting for large vendors. The rationale for repealing the discount was that improved technology has alleviated the filing burden. In addition, because the 20 largest vendors, representing 1% of filers, receive 25% of the total discount, repeal “would provide more equity between large and small retailers,” and save the state $20 million annually (Governor’s Budget Recommendations, p. 5 (December 2009)). This proposal was not included in later budget recommendations. Will similar concerns be raised if only large, remote vendors voluntarily register? (For vendor discounts among states, see information from the Federation of Tax Administrators.)
The developments in Colorado, Missouri, and Utah illustrate the problems with sales and use tax collection. These problems are not just the ones inherent with sales and use taxes—but with state actions that hinder collection.
Colorado: The preliminary injunction decision (DMA v. Huber) noted that first-year compliance costs for affected remote vendors would range from $3,100 to $7,000. This is a significant cost. Will the state reconsider the 2010 law? The legislature’s and revenue department’s time might be better spent:
Making it easier for consumers to pay their use tax. For example, a use tax line could be added to the income tax form for every state that imposes a sales and use tax as well as an income tax. Of the 38 states with both sales and income taxes, 25 allow use tax to be reported on the individual income tax form (Minnesota House of Representatives, Use Tax Collection on Income Tax Returns in Other States, p. 5 (April 2012)).
Convincing Congress to enact the MFA or legislation requiring vendors to include use tax notices on all invoices.
On a brighter note (in terms of collecting sales and use taxes), Colorado enacted legislation in 2013 to ensure that, if the MFA is enacted, its sales tax law would comply with the required simplifications (Colo. H.B. 1295) (2013 Digest, pp. 232–3).
Missouri: The $2,000 purchase threshold for reporting and collecting use tax creates numerous problems.
First, many consumers are allowed to ignore the tax even though simplified compliance is possible (such as use of a look-up table similar to those used in California and a few other states). Also, passing the MFA will not eliminate consumers’ desire to have a threshold. For example, even with the MFA, states will not be collecting sales tax from small vendors or those based outside the United States. Consumers will still want the relief the state has always given them. They may also want an income tax break to offset any new sales tax they owe. There will be uncertainty about the MFA’s effect on Missouri sales and use tax collections.
Missouri should consider replacing the use tax threshold with a look-up table and reporting the tax on the individual income tax form. Should the state decide to give some relief in the form of an income tax adjustment, it could be an income tax credit based on a percentage of reported use tax. If the MFA is enacted, the look-up table and related credit could be appropriately adjusted downward. The result of these changes should be to make consumers more aware of and more compliant with use tax.
Utah: To truly entice vendors to take on a reporting obligation they are not subject to, the state likely needs to make a greater offer, such as amnesty or compliance assistance (e.g., free software). The state should also be ready to address the likely plea from in-state vendors to also have an 18% discount.
Use tax collection is challenging, but it is not impossible. While a number of states have tried to improve collections, they also have created additional problems. The end result is that states are still seeking sales and use taxes.