Sales and Use Taxes for E-Commerce Transactions
Klamm, Bonnie K., Zuber, Jill M., The CPA Journal
Examining Court Decisions and Pending Legislation
Most states impose sales and use taxes on retail sales of certain tangible personal property. Sellers with a physical presence in the state must report their taxable sales and remit the appropriate amount of sales tax. Sellers without a physical presence in the state are not responsible for collecting sales tax, although consumers who purchase goods from outof-state sellers for consumption within their resident state are responsible for paying a use tax to that state. Thus, physical presence^ - or "substantial nexus," from the Latin word nectere, meaning a connection, link, or tie - is a key determinant for calculating a seller's sales tax responsibility. Through legislation, states are challenging the fact that out-of-state sellers are only required to collect sales tax from a purchaser when they have a physical presence in the state. States are broadening the meaning of nexus with regard to electronic commerce (e-commerce) transactions in an attempt to expand the use tax base and increase tax filing requirements.
One reason for states' challenges is their frequent dependence on revenues from sales and use taxes. Exhibit 1 provides a sense of this reliance and how it varies among the 50 states by listing the amount of sales and use taxes, individual income tax, and corporate income taxes collected in 2011. The total sales and use taxes collected exceeds $234 billion (43.9% of the total tax collected). The percentage of sales and use taxes collected varies among the states. For example, neither Montana nor Oregon has a sales or use tax; both states generate revenues from individual and corporate income taxes alone. Washington has no income tax, but relies heavily on revenues from its sales and use taxes, as well as revenues from its business gross receipts tax. With no individual income tax, Florida collects more than $19 billion in sales and use taxes (91% of total taxes) and approximately $1.8 billion in corporate income tax.
Another reason for states' challenges is the rise in e-commerce sales. The U.S. Census Bureau estimates that the total amount of sales in 201 1 was $4.7 trillion; e-commerce represents about 4.6% of those sales ($194.3 billion). For 2011, ecommerce sales increased 16.1% from 2010, compared to only a 7.9% increase in total sales.
CPAs should remain aware of laws and regulations related to sales and use taxes, as well as the evolving landscape associated with sales and use taxes for ecommerce transactions. They should be familiar with the relevant court cases addressing sales and use taxes - which establish a basis for current law and the potential for future changes - and with related information about state and federal activities. CPAs can use web-based resources to keep current on sales and use tax changes for e-commerce transactions.
In the Courts
To date, the obligation to collect sales and use taxes has been dictated by U.S. Supreme Court decisions, such as National Bellas Hess Inc. v. Department of Revenue of the State of Illinois (386 U.S. 753 ), Complete Auto Transit Inc. v. Brady (430 U.S. 274 ), and Quill Corporation v. North Dakota (504 U.S. 298 ). These cases provide brightline tests for cteterrnining whether an outof-state business is required to collect and remit sales or use tax. At issue is the application of the Due Process and Commerce clauses found in the U.S. Constitution. The Due Process Clause, as defined in Miller Brothers Co. v. Maryland (347 U.S. 340 ), "requires some definite link, some minimum connection, between a state and the person [which includes businesses] ... it seeks to tax"; however, this minimum connection is not enough to require interstate businesses to collect and remit sales tax. Under the Commerce Clause, states can require collection and remittance of sales tax only when an interstate business has a physical presence - that is, substantial nexus - within that particular state. …