Federal watchdog calls for national sales tax standards online
The federal government’s top watchdog is urging Congress to create national standards for taxing the sale of goods, saying a US Supreme Court ruling has led to a ‘complex patchwork’ of state and local regulations that are burdensome and unfair to some businesses.
There is at least some support for the idea in Congress.
Senate Finance Chairman Ron Wyden, who has proposed national standards along these lines, says it’s difficult trying to follow regulations that vary from state to state, and even city to city. to another, especially for small businesses selling products online across the country. Notably, Wyden’s home state of Oregon does not enforce general sales for online or physical transactions.
“It’s hard enough to run a small business without having to deal with hundreds of different state and local sales tax regimes,” said Wyden, a Democrat whose committee is responsible for tax policy. in a press release. Road Fifty.
Bills proposed by Wyden and others that would create consistency across states on issues like small businesses exempt from collecting sales taxes for online sales, have been unable to find the votes to pass in Congress.
The National Conference of State Legislatures has opposed proposals like this in the past, fearing they would prevent states from setting their own tax policies.
Capitol Hill lawmakers are also divided on issues such as whether to tax online sales. And with Republicans claiming the House in this year’s election and Democrats still in control of the Senate, Congress is likely heading for a period of legislative deadlock for at least the next two years.
“It’s uncertain whether it will be successful, but I wouldn’t bet on it with a stalemate next year,” Garrett Watson, senior policy analyst at the Tax Foundation, said in an email, referencing to national sales tax policy proposals online.
The issues at stake involve a range of tax rules adopted across the country since a 2018 U.S. Supreme Court ruling in the case. South Dakota vs. Wayfair.
In a landmark decision for state and local governments, the High Court ruled that states can start taxing their residents’ online purchases, even if the businesses making the sales do not have a physical location, such as a store or warehouse, within their boundaries.
Previously, under court precedent from the mail-order catalog era, states were limited to taxing online sales only by businesses with a physical presence in the state.
In the years since Wayfairstates that said the old restriction was costing them revenue “responded quickly with new distance sales tax requirements, resulting in a complex patchwork of widely varying requirements,” the US Government said. Accountability Office in a report published this month.
As of June 2021, all 45 states with statewide sales taxes, plus the District of Columbia, had passed laws on collecting sales taxes for online sales by U.S.-based businesses. outside their borders, according to the report.
The problem, according to the GAO report, is that the wide variety of laws has made it difficult for businesses because selling products to a customer in one state involves complying with different laws than when selling the same product. to someone in a different state.
For example, states have different thresholds defining which small businesses are exempt from collecting the tax.
As of September, according to the GAO report, 22 states and DC were exempting businesses unless they had $100,000 in sales or 200 online transactions with in-state consumers.
California, New York and Texas, on the other hand, have set a higher threshold, exempting companies unless they have sales of $500,000. Other states, like Florida, Kansas, and Missouri, also don’t track the number of sales, just the dollar amount.
The rules also vary depending on when businesses are required to register with states.
Some, like Maine, Mississippi, South Dakota and Wisconsin, require registration as soon as a business reaches the threshold that makes it subject to taxes. Others have different rules, such as Hawaii and Maryland, which require registration the month after the threshold is reached.
Additionally, 10,000 to 12,000 localities across the country impose sales taxes, many of which have different rules and rates.
Alabama alone has more than 300 local tax authorities, the report notes.
Some states have attempted to simplify regulations nationwide, the GAO report notes. A notable effort on this front is the Sales Tax Streamlining Project, which has sought ways to reduce administrative and compliance costs and the difficulties businesses face with sales taxes.
Specific states, such as Alaska and Colorado, have also attempted to create centralized systems for collecting local online sales taxes. But they saw mixed results in terms of adoption. For example, as of September, only 80% of localities that administer their own sales taxes in Colorado were participating in the initiative there, according to the GAO report.
“Forty-five states and hundreds of localities have different sales tax laws. Different tax rates. Different regulations for who collects taxes. Different rules and definitions for taxable products. In Illinois, you will pay sales tax on a Snickers bar, but not on a Twix. Wyden noted during a Finance Committee hearing on the matter in June.
“Small businesses are responsible for managing this complex web of laws. They are basically forced to buy expensive software and hire consultants,” he said, adding, “As long as the Wayfair in power, Congress should step in and relieve small businesses.
Wyden also said in his statement to Road Fifty that under WayfairCongress should exempt small businesses with revenues below a certain threshold and establish standard rules that “define what states can charge small businesses outside their borders.”
Wyden in 2019 reintroduced a bill, the Online Sales Simplicity and Small Business Relief Act, which would have exempted small businesses that make less than $10 million a year in total sales. The bill would also have prevented states from beginning to impose the tax until 2021. The legislation was originally proposed in 2018 by Democratic Senator Jeanne Shaheen of New Hampshire, another state that does not have a general sales tax. on the goods.