States See Little Revenue From Online Sales Tax Laws, Keep Pressure on Congress
Jan. 3 — Most states are seeing scant revenue from their varied attempts to collect tax from online retailers on sales to their residents, but they will continue to push for state laws until Congress or the U.S. Supreme Court settle legal questions about their collection authority on remote sales, state officials and stakeholders told Bloomberg BNA in interviews in November and December.
As long as the legal landscape remains murky, state lawmakers along with the retailers and business groups that support a federal solution to online sales tax will chip away at the issue at the state level to keep pressure on Congress and the courts, regardless of the success of the state laws, they said.
With the fate of the Marketplace Fairness Act (S. 743) in Congress uncertain, and the U.S. Supreme Court declining Dec. 2 to hear a legal challenge to New York’s online sales tax law, the landscape is likely to remain vague.
“If the Supreme Court doesn’t think this is ripe or appropriate for their jurisdiction, the states are going to go a little rogue,” Kelley C. Miller, an associate in the Washington office of Reed Smith LLP, told Bloomberg BNA. “It’s going to be a little bit of the wild west out there, with states saying, ‘how far can we push this notion of who can have nexus in the state?’ ”
States are testing the limits of the 1992 U.S. Supreme Court ruling in Quill v. North Dakota, 504 U.S. 298 (1992), which prevents them from levying sales and use tax on transactions when the seller has no physical presence in the state. The Marketplace Fairness Act could undo that ruling and grant them clear taxing authority.
Through interviews with state officials and research into laws or retailer-specific agreements enacted in 17 states in the past few years, Bloomberg BNA found that most states aren’t keeping track or are unable to say how much revenue they have gained through their efforts aimed at collecting tax on online sales from out-of-state retailers, for various reasons (see chart).
For states with recent laws, it is too early to know if revenue is living up to projections. For some of those states and others, sales tax revenue from online retailers isn’t separated from all other sales tax revenue and therefore can’t be tracked. In states with laws or agreements that apply to only one taxpayer—Amazon.com—confidentiality rules prohibit release of revenue data.
What to Expect
Estimates of the revenue that could be collected nationwide by states vary from $23 billion a year, according to an economist at the University of Tennessee, to $3.9 billion a year, according to economists at Navigant Consulting Inc., and $3.55 billion a year, according to NetChoice, a coalition of online retailers that opposes the Marketplace Fairness Act. NetChoice’s estimate represents 0.028 percent of the tax on $1.267 trillion in total annual sales. The imprecise estimates make the payoff for states uncertain even if a federal law is enacted.
“It’s more than I have on me but less than what the states are expecting,” Joe Henchman, vice president for legal and state projects at the nonpartisan Tax Foundation, said.
Two states that can say how much revenue they have collected—New York and California—are able to report millions in revenue because they are the two largest markets for online retailers. While online retail giant Amazon and others have dropped sales affiliates in smaller states that have passed online sales tax laws to avoid triggering nexus, they have kept affiliates or opened warehouses in California and New York to hold onto their market share, and in New York’s case, to have standing to challenge the state law in court.
“If the Supreme Court doesn’t think this is ripe or appropriate for their jurisdiction, the states are going to go a little rogue.” Kelley C. Miller, Reed Smith LLP
In North Carolina, the only other state that reported revenue to Bloomberg BNA, the Department of Revenue said it has collected $39 million since the law took effect in 2009. However, observers told Bloomberg BNA the state most likely lost revenue overall because many retailers cut ties with affiliate marketers in the state.
North Carolina’s experience is similar to several other states, Max Behlke, manager of federal and state relations for the National Conference of State Legislatures, told Bloomberg BNA. Many state officials think they are solving the problem of revenue lost to online sales when they pass their laws, only to see the problem exacerbated when affiliates are cut off.
State officials are realizing they may be losing money under their laws, and are more convinced than ever that the problem must be solved at the federal level, Behlke said.
Amazon has terminated and will not accept new affiliates in Arkansas, Colorado, Maine, Minnesota, Missouri, North Carolina or Rhode Island. Overstock.com Inc. will not accept affiliates in New York, North Carolina, Rhode Island, Illinois, Arkansas or any state in which the law deems Overstock to have nexus for sales and use tax purposes because of affiliate agreements, according to its website.
Not Satisfied for Long
“The laws have been abject failures,” Rebecca Madigan, executive director of the Performance Marketing Association, told Bloomberg BNA. PMA represents affiliate marketers, many of whom have been cut off from marketing and sales agreements with Amazon and other retailers. “It boggles my mind that a state would pass a law without a way to track if the law is effective.”
Some states that have reached individual agreements with Amazon to begin collecting sales tax rather than enacting a law aren’t likely to be satisfied for long, Madigan said.
“That strategy appeases states for a while, but then they’ll want to go after other retailers,” she said.
Madigan said states will continue to pass laws forcing the issue of online sales tax collections “as a tool to pressure Congress,” without regard for the damage they are causing to some business sectors, such as affiliate marketers.
Most states that have enacted their own laws in the absence of federal action have taken aim at affiliate nexus, also called click-through nexus. Under such laws, an online retailer has nexus in the state if it maintains relationships with in-state affiliates, such as bloggers with links or ads through which customers click to a retailer’s site to buy items. The laws have varying thresholds for annual sales through those affiliates that trigger nexus.
Colorado has taken a different approach, passing a law in 2010 that imposes reporting and notice requirements on e-commerce vendors and other retailers that don’t collect taxes on sales to state purchasers.
The Direct Marketing Association has sued Colorado over the statute, saying it violates the Interstate Commerce Clause of the Constitution. The U.S. Court of Appeals for the Tenth Circuit on Oct. 1 denied the association’s request for full review of the suit, remanding the case to a lower district court (Direct Mktg. Ass’n v. Brohl, 10th Cir., No. 12-01175, petition denied 10/1/13).
The Direct Marketing Association has also petitioned the Supreme Court to hear the case.
The uncertain or weak revenue projections, together with the fact that Amazon is already collecting sales tax for 57 percent of the population and the percentage will keep increasing, make the state laws pointless, Steve DelBianco, executive director of NetChoice, told Bloomberg BNA. Further, retailers increasingly are offering brick-and-click shopping that allows them to purchase and return items either way, and they generally are collecting tax.
“The [state revenue] numbers are hard to get, and it is impossible to attribute that to a law the state passed,” DelBianco said.
NetChoice members include Overstock, eBay Inc., PayPal Inc., Facebook Inc. and Yahoo! Inc.
Amazon spokesman Ty Rogers told Bloomberg BNA the company supports the Marketplace Fairness Act and has consistently opposed state-by-state laws. The company doesn’t break out its revenue by state, he said.
“Amazon is a fraction of the overall market so even if Amazon is collecting in a state, federal legislation is the only way for states to collect more than a fraction of the revenue already owed,” Rogers said in an e-mail.
Without federal action, the primary focus for a national solution is the Streamlined Sales and Use Tax Agreement (SSUTA). Twenty-three states are full members of the agreement, through which retailers voluntarily collect and remit sales tax on remote sales in member states where they aren’t physically present.
“The [state revenue] numbers are hard to get, and it is impossible to attribute that to a law the state passed.”Steve DelBianco, executive director, NetChoice
From Oct. 1, 2005, through Dec. 31, 2012, $1.3 billion in sales tax has been collected by retailers registered with the streamlined project, Streamlined Sales Tax Governing Board (SSTGB) Executive Director Craig Johnson told Bloomberg BNA. The figure reflects all remote sales, including Internet sales.
Most of the SSUTA members are smaller states, but with Ohio becoming a full member in 2014, supporters of the streamlined project and the Marketplace Fairness Act predict a critical mass of state support that makes a national solution more likely.
Revenue Isn’t All That Matters
State revenue may be one way to measure the success among states trying to collect sales tax on online sales, but it isn’t the only measure, several observers told Bloomberg BNA. Arguments surrounding a federal solution also focus on tax fairness between online and brick-and-mortar retailers, and the tension over the reach of state tax authority, Henchman and others said.
“I don’t know if anyone supports this just for the revenue,” he said.
Even if the laws haven’t increased revenue for states, the attention surrounding them has increased the public’s understanding of sales tax laws and likely boosted revenue through voluntary compliance with sales and use tax obligations in ways that are difficult to measure, Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities, told Bloomberg BNA.
“Ultimately a federal law is essential, but we are a strong advocate of state laws that are chipping away at the larger problem on the margins,” Mazerov said. “The ferment at the state level has helped move the federal legislation forward and energized the main street community.”
DelBianco of NetChoice disagreed.
“All this has done is confuse the debate in Congress,” he said. “It really hasn’t moved the needle on the Marketplace Fairness Act.”
Closer Look at Key States
Overall, Bloomberg BNA examined online retailer tax collection rules or agreements in 17 states, the amount of revenue expected, and the actual revenue collected. Projected revenue gains varied from zero in Arkansas to $107 million or more a year in California. Through interviews with state officials and other observers, Bloomberg BNA took a closer look at online sales tax laws in a few key states.
California collected $349.2 million in revenue from 45 retailers generally associated with the state’s new online sales tax law between the effective date of Sept. 15, 2012, and the reporting quarter that ended Sept. 30, 2013, according to the State Board of Equalization. About half of the revenue goes into the state general fund, and the rest goes to state and local governments.
Due to taxpayer confidentiality rules, the SBOE can’t release information that would show how many of the 45 retailers registered with the state because they have nexus under the new law, and how many are “generally associated” with the law such as Amazon, an SBOE spokeswoman said.
Amazon decided to open warehouses in the state at about the same time the law took effect, making it a retailer with a physical presence in the state and not a retailer with nexus triggered by the new law.
California’s law establishes sales tax nexus for online retailers in three ways: based on relationships with instate affiliates such as bloggers with links or ads through which customers buy from the retailers; based on the presence of corporate group members in the state; or based on state regulators’ determination of nexus to the extent allowed under current law. Affiliates and retailers with less than $1 million in annual sales in the state are exempt.
To further boost collections, California has placed a line on the state income tax form for taxpayers to self-report use tax, along with a lookup table that estimates tax liability based on income. The tax return line generated $21.1 million in 2012.
Both supporters and opponents of a federal solution to online sales tax collections point to California’s experience as a boost to their side of the argument. When the law took effect without much fanfare or grumbling from California shoppers, it either meant consumers have accepted the fact that they owe tax on purchases online the same as they do at local stores, or it meant that Amazon simply put warehouses in the state to keep up with consumer demand for fast delivery regardless of whether California or any other state passed a similar law. Either way, electronic commerce hasn’t been harmed.
“Amazon’s sales are through the roof,” Madigan at PMA said.
Since Connecticut adopted its affiliate nexus law in 2011 , some retailers, including Amazon, halted their relationships with affiliates in the state to avoid having to collect sales tax on sales there, Tax Commissioner Kevin B. Sullivan told Bloomberg BNA .
However, in early 2013 Amazon said it planned to construct a fulfillment center in Connecticut, and as part of that plan, agreed to begin collecting and remitting state sales tax beginning in November 2013.
Sullivan said it is too early to determine the amount of sales tax revenue the agreement with Amazon will generate, but legislative estimates predict that the agreement will generate $15 million in the current fiscal year and $20 million to $25 million in a full fiscal year.
Now that Amazon has agreed to collect and remit state sales tax, Sullivan said his office plans to turn attention to other large remote retailers that have a “significant amount of business activity” in Connecticut in an effort to determine if they have nexus and should therefore be collecting and remitting sales tax under the 2011 law.
Sullivan said his office is also “beefing up” its own outreach to let taxpayers know that they are responsible for reporting and paying use taxes to the state on purchases for which retailers don’t collect tax. For example, he said, the Department of Revenue Services is revising its income tax forms to make it doubly clear to taxpayers that they are responsible for use taxes. Such efforts might include a new use-tax line item that is pre-populated with a set amount, or a statement saying that by signing the form you have declared any and all tax you owe the state of Connecticut, including use taxes, he said.
Sullivan said Connecticut is also working with a number of organizations, including the Federation of Tax Administrators, the NCSL and the National Governors Association, to “keep the heat on” for passage of the federal Marketplace Fairness Act, which would save states from individually having to pursue remote retailers over sales tax collections.
Illinois and Wisconsin
The neighboring states of Illinois and Wisconsin have taken very different paths in their campaigns for sales tax fairness and have come to two unexpected results.
Illinois enacted an aggressive affiliate nexus law in 2011. The Mainstreet Fairness Act (Illinois Public Act 96-1544) required online retailers that maintain relationships with marketing affiliates located in Illinois to collect sales taxes on customer purchases and remit their collections to the Illinois Department of Revenue.
At the time, the Illinois Department of Revenue estimated online retailers operating in Illinois were failing to collect between $153 million and $170 million annually.
Despite the fanfare over the tax fairness law, IDOR has no data demonstrating the law actually brought new revenues into state coffers.
“We have no actual data because it doesn’t come in separated by whether it is an online merchant or a bricks-and-mortar merchant,” IDOR spokeswoman Susan Hofer told Bloomberg BNA. “There is just no way to know. There is no red flag on it that says ‘this is an online purchase.’ ”
Hofer noted that the law did cause some remote sellers to become regular tax collectors. In total, Hofer said about two dozen online retailers began collecting sales taxes for the first time. Notably, however, Amazon was not on the list. Shortly after the law was enacted, Amazon severed all of its relationships with Illinois-based affiliates.
Illinois lawmakers and tax administrators were stunned in October when the Illinois Supreme Court voided the law after finding that the federal Internet Tax Freedom Act (ITFA) preempts the state from imposing a prohibited, discriminatory tax on electronic commerce (Performance Marketing Assn. Inc. v. Hamer, Ill.,No. 114496, 10/18/13).
Hofer said the state is considering its legal options, with an appeal likely.
In sharp contrast, Wisconsin has avoided the affiliate nexus route but has become the beneficiary of Amazon’s aggressive expansion efforts.
Laurel Patrick, a spokeswoman for the Wisconsin Department of Revenue, said Amazon recently obtained a seller’s permit and began collecting taxes on transactions into Wisconsin on Nov. 1. The retailer’s commitment is expected to bring Wisconsin $30 million during 2014. Patrick noted that Amazon’s commitment coincides with its decision to build a new 1 million square-foot distribution center in Kenosha, Wis.
While the Amazon commitment provides significant new revenues to Wisconsin, Patrick said millions of dollars remain uncollected. She pointed to an analysis by department economists showing the state would collect $72.2 million through remote sellers in 2015 with passage of the federal Marketplace Fairness Act.
The Minnesota Legislature passed a law in May aimed at enhancing the state’s collection of online sales tax revenues, according to Janelle Tummel, state revenue department spokeswoman, but it won’t know for at least several weeks or months how successful that law has been.
She said the law, which requires out-of-state online retailers to collect the state’s 6.875 percent sales tax if they meet its nexus requirements, only took effect July 1. A soon-to-be-released revenue forecast should give the state an idea of whether its revenue projection of $5 million is accurate, she said.
She noted, however, that the state estimates it loses nearly $400 million in sales tax revenues from online sales each year. The new law should increase sales tax revenues, but the state is still hoping Congress passes the Marketplace Fairness Act. That bill, she said, would allow for the full collection of online sales taxes.
Under H.F. 677, out-of-state retailers who maintain a place of business in Minnesota are required to collect and remit the state’s sales and use tax on sales made outside the state to destinations in the state. Maintaining a business in the state includes those with offices or warehouses in Minnesota, as well as those with representatives in the state. Those who lease personal property in the state or who deliver tangible personal property into the state in their own vehicles are also considered to maintain a Minnesota business.
Out-of-state retailers can also be presumed to maintain a place of business in Minnesota if they enter into an agreement with a resident for a commission; if a resident representative solicits business from Minnesota customers; or if their gross receipts during the past 12 months have totaled at least $10,000.
Tummel said a number of online retailers voluntarily collect Minnesota’s sales and use tax. In the third quarter of this year, she said, the state collected nearly $3.2 million in tax revenues from those voluntarily collecting the tax. Minnesota is a member of SSUTA.
New York state has collected $503 million in state and local sales taxes since it enacted its landmark Internet tax law in 2008, according to figures provided to Bloomberg BNA by the Department of Taxation and Finance.
The state collected $145 million in the 2012-13 fiscal year, which ended March 31, 2013, according to the department. In the first full year after enactment, fiscal year 2008-09, the state collected $57 million. It had projected to raise $50 million in fiscal year 2008-09.
The state collects about $11 billion in sales and use taxes each year.
Geoffrey Gloak, a spokesman for the department, told Bloomberg BNA that the $503 million in revenue comes from about $6 billion of taxable retail sales that were previously made without the sales tax being collected. “Overall, 77 of the top 100 Internet retailers (accounting for 90 percent of the sales by the top 100) are collecting sales tax on their sales in New York State,” Gloak said in an e-mail. The 2008 New York law required online retailers such as Amazon and Overstock to collect sales taxes if they enter into agreements with individuals or companies in New York to refer customers to their websites.
The law, which was amended in 2009 to expand the definition of sales tax vendor to include out-of-state retailers with New York affiliates, was challenged by Overstock and Amazon and upheld by New York’s highest court in March.
The Supreme Court denied review of that decision Dec. 2.
A New Hook
The continued lack of clarity from Congress and the Supreme Court will embolden the states to experiment with the legal boundaries of nexus, Miller at Reed Smith said. She pointed to a proposal in Michigan that imposes nexus if a seller uses trademarks, service marks or trade names that are substantially similar to marks and names used by any other person that has substantial nexus with the state. Miller said the proposal strikes her as strange, but indicates the new “wild west” in terms of state nexus laws.
States are also pitching a new hook to entice Congress to act: a promise to cut state taxes using new revenues under a federal law. Wisconsin Gov. Scott Walker (R) enacted a state budget plan in June that calls for elimination of the state alternative minimum tax and reduction of income tax rates if the MFA is enacted.
Missouri, Ohio and Utah officials have made similar promises, Behlke told Bloomberg BNA. The promise of reducing taxes at the state level can help sway Republicans in Congress who resist the Marketplace Fairness Act because they consider it a tax increase, he said.
While states continue to weigh their own laws, the prospects for a federal law are uncertain. The president of SSTGB Inc. predicted Dec. 13 that the House will act as soon as late March or early April on the MFA, which passed the Senate in May.
The NCSL, the Retail Industry Leaders Association and other groups that support the measure are also predicting passage in early 2014.
“No doubt the actions at the state level have gotten the attention of Congress,” RILA Vice President for Communications and Advocacy Jason Brewer told Bloomberg BNA. “Congress is poised to act.”
RILA members include Best Buy Co., The Home Depot, Target Corp., Walmart Stores Inc., and J.C. Penney Co. Inc.
DelBianco said no measure is likely to pass unless it adheres to the principles outlined by House Judiciary Chairman Bob Goodlatte (R-Va.) in September, and the MFA meets none of those principles.
“The MFA must dramatically change or some other new concept needs to satisfy Goodlatte’s principles,” he said.
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