Editor’s Note: This is the third and final installment of a three-part series looking at the issue of local and state sales tax collection on internet purchases.
Whether states will be able to require companies to collect local and state sales taxes on internet purchases, regardless of whether the company is located within the state, is a question likely to be determined by the U.S. Supreme Court.
The court has ruled on the issue once before, though it was in the early ’90s, before the internet became a staple of daily life.
In 1992, the North Dakota tax commission sued Delaware-based office supply retailer Quill Corp. to collect taxes on online sales for the state.
The highest court ruled in favor of Quill that because the company didn’t have a physical presence in the North Dakota, it didn’t have to collect those taxes.
“The Supreme Court … ruled that these out-of-state internet sellers did not have to collect the state and local taxes,” said Arkansas Municipal League Executive Director Don Zimmerman. “One of the reasons was that the internet was a fledgling, brand-new thing that was kind of getting off the ground and needed to have an advantage over the brick-and-mortar stores, who were established and doing well … to help get that industry get started and it has definitely worked because that industry is huge now.”
Zimmerman said the Arkansas General Assembly should craft legislation that reflects “marketplace fairness,” or requiring all merchants, online or otherwise, collecting sales tax on all purchases.
“The cities, counties and state lose their sales tax revenue when a person buys off the internet from a provider that doesn’t collect it because it’s usually not paid because the purchaser’s don’t keep up with their receipts of all that or fill it out on their income tax form and pay it as an use tax,” he said. “There about 20 states that have done what we’re trying to get Arkansas to do, and that is to pass a bill that says these folks are supposed to collect it.”
But just getting a state law passed won’t be enough.
Zimmerman said he expects a business to sue one of the 20 states and take the case to the U.S. Supreme Court.
In August, Indiana filed a lawsuit to defend its law allowing the state to make those collections. According to the Associated Press, the state’s suit has been filed against Boston-based home goods retailer Wayfair Inc. and Utah-based closeout retailer Overstock.com Inc. Indiana Gov. Eric Holcomb has said he wants the U.S. Supreme Court to overturn the 1992 decision, and a study done by the Indiana Fiscal Policy Institute and Ball State University estimated the state lost around $77 million in 2012 because of the inability to collect sales taxes on internet purchases.
Another way to collect sales taxes on such purchases is to pass a marketplace fairness bill in the U.S. Congress, but Zimmerman said Rep. Bob Goodlatte, R-Virginia, is “holding up everything.”
“The Senate passed it a couple years ago … and I think it had 69 votes, but when it got to the House, it couldn’t get out of the judiciary committee that was chaired by a congressman from Virginia who was very much against it,” he said. “We’ve still got that problem. (Goodlatte) is still there opposing it and still unwilling to let it go through his committee.”
Until this year, AML lobbied among congressmen such as Arkansas Republican Sen. John Boozman, who has “always supported it,” and U.S. Rep. Steve Womack, R-Ark.
“Congress just hasn’t done it. Not saying we’ve given up on them, but we’re trying to do what we can with the state legislature and maybe through the courts,” Zimmerman said.
Boozman is listed as a co-sponsor on the Marketplace Fairness Act of 2017, which has more than 25 co-sponsors from across the country and across party lines. According to the bill summary, it would authorize states to “require all sellers not qualifying for a small-seller exception (applicable to sellers with annual gross receipts in total U.S. remote sales not exceeding $1 million) to collect and remit sales and use taxes with respect to remote sales” under the Streamlined Sales and Use Tax Agreement, a multistate agreement that was adopted in 2002.
When asked about the issue, Boozman’s office provided the following:
“Our Main Street businesses operate at a significant competitive disadvantage because they have to collect taxes and online sellers do not. The Marketplace Fairness Act levels the playing field for small business owners so they aren’t unfairly penalized in favor of retailers operating remotely. This legislation ensures states’ rights and empowers Arkansas to enforce its own laws and collect taxes that are already owed. This is not a new tax, and our local businesses deserve this fairness which will support services in our communities. I’m hopeful the Senate can pass this bill this Congress.”
But even though the bill has bipartisan support, it does not have support from all of Arkansas’ congressional representatives. Sen. Tom Cotton and Rep. Bruce Westerman, both Republicans, consider such a move to be a new tax on consumers and do not support it.
Westerman spoke to the News-Times and said the issue is more complicated than simply deciding to start collections. He said it has to be discussed whether collections occur at the point of sale or point of proof - essentially should the tax be collected when the item is ordered or delivered.
But ultimately, he said, the largest issue is the effect on consumers.
“There are fairness issues,” Westerman said, noting those issues apply to both businesses and consumers. “A lot of people are going to see it as a new tax.”
Westerman said Congress needs to look at the overall tax code, something the Trump administration has been in the process of doing, with President Donald Trump beginning the public push for the overhaul earlier this week when he rolled out a new tax proposal.
“There’s not a simple solution,” Westerman said, adding that he doesn’t exactly have a lot of “constituents running up to me and saying we need to change this.”
When asked about the issue, Cotton’s office provided the following:
“Senator Cotton believes Arkansans taxes are already too high and our tax code is too complicated. We simply don’t need another tax to add to that burden. Instead, Senator Cotton is working with President Trump and his colleagues in Congress on broader tax reform that simplifies our tax code and keeps Arkansans’ hard-earned dollars in their pockets. And there’s no reason we can’t work together to ensure more e-commerce jobs are in Arkansas.”