Contributed Column

Tax Talk

by Kaj Samsom, CPA, Vermont Tax Commissioner

Supreme Court puts an end to ‘tax-free’ online sales

In just 20 years, e-commerce has evolved from essentially nonexistent to about 10 percent of the retail market. This rapid change has had a profound impact on retail businesses and state revenues.

The U.S. Supreme Court’s pre-Internet Quill ruling thwarted states’ efforts to enforce sales tax collection laws on online sellers, where retail growth has been concentrated. The perception that online sales are tax free has been challenging for states and “Main Street” businesses. To maintain a level playing field and protect revenues, tax authorities resorted to existing use tax laws, which awkwardly require the buyer to declare and remit sales tax if the retailer fails to collect it. Then on June 21, a game-changer: The U.S. Supreme Court issued the Wayfair vs. South Dakota decision, which removed the sales tax enforcement obstacles created by Quill vs. North Dakota. States can now enforce their sales tax collection laws on Internet sales in the same way they always have on traditional retailers.

In the ruling, the court upheld South Dakota’s threshold for requiring tax collection (200 transactions or $100,000 of sales). Vermont has identical thresholds in a law that was triggered by this decision. The requirements for vendors who meet those thresholds to register and collect Vermont’s sales and local option taxes (where applicable) began July 1.

How this development affects Vermont depends on whom you ask. Consumers will notice more websites including sales tax in their shopping carts. This will impact state revenues. In the current fiscal year, we expect a surge in registered vendors with new and recurring revenue growing as high as $15 million by FY20. With 100 percent of the sales tax now going to the education fund, new revenue will help stabilize or reduce future education property tax rates.

Vermont retailers’ reactions will be mixed. Downtown retailers will likely be pleased, viewing it as a leveling of the playing field. With their Internet competitors’ now having to collect sales tax and absorb the same compliance costs, competing on price may become a little easier.

Vermont e-commerce businesses that sell across state lines will not feel the same. To the extent they have not been collecting the sales tax in some or all jurisdictions, they are in a very difficult position. In extreme cases where online retailers sell nationwide, have not been collecting sales tax, and did not plan for this decision, they are now faced with a Herculean task of rapidly getting up to speed on complex and varied sales tax rates, definitions, and exemptions. This will place a significant new and unwelcome cost on these businesses, and where profitability is impacted, so are employment and Vermont’s income tax revenues.

As I reflect on the differing perspectives in this debate, one thing is clear to me: The real issue is the sales tax itself, not who has to collect it. Sales tax is extremely complex, with industry, item, and buyer-based exemptions (about 50 in Vermont law). Take all that complexity and add an exponent, because there is little consistency in definitions and exemptions across all the taxing jurisdictions. For example, two states that exempt “widgets” from sales tax may have entirely different definitions of a widget. That simple example is just the tip of the complexity iceberg. If sales tax laws and definitions were consistent across the nation, 90 percent of online retailers’ woes stemming from this decision would disappear.

As justifiably frustrated Internet retailers struggle through this transition, perhaps there is a silver lining, as it might reinvigorate focus on streamlining and simplifying our sales tax laws throughout the U.S. If we can move in that direction, businesses, consumers, and tax administrators will all win.•

Kaj Samsom, CPA, is commissioner of the Vermont Department of Taxes.

Index of Contributed Columns

For information on submitting a contributed column see here.