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Wolters Kluwer, CCH can assist you with stories, including interviews with subject experts.
Also, the 2014 Whole Ball of Tax is available in print. Please contact:
 
Eric Scott
(847) 267-2179
eric.scott@wolterskluwer.com
 
Brenda Au
(847) 267-2046
brenda.au@wolterskluwer.com

Visit the Whole Ball of Tax site often as new releases and other updates will be posted
throughout the tax season.

Wolters Kluwer, CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation.

 
2014 CCH Whole Ball of Tax
Release (9) | Back to WBOT

2014 Wolters Kluwer, CCH Whole Ball of Tax

Contact:
Eric Scott , 847-267-2179, eric.scott@wolterskluwer.com
Brenda Au , 847-267-2046, brenda.au@wolterskluwer.com

Uncertain Future for “Tax-free” Online Shopping: Wolters Kluwer, CCH Examines Developments, Details

(RIVERWOODS, ILL., January 2014) – While the popularity of online shopping continues to grow, with more shoppers heading to their keyboards instead of the malls, confusion still persists over sales taxes collected on purchases, especially for transactions that cross state borders. Although buyers are supposed to report any taxes they didn’t pay for Internet purchases, federal legislation designed to simplify the patchwork of state rules requiring online retailers to collect taxes has fallen short from being signed into law. CCH, a part of Wolters Kluwer and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com), takes a look at the current status of collecting online sales taxes.

In 2013, the U.S. Senate passed the Marketplace Fairness Act, which would grant states authority in requiring most remote sellers to collect sales and use tax on sales to in-state customers – protecting “bricks-and-mortar” businesses from an unfair advantage. However, the legislation has still not passed the House of Representatives. Full details of the Act are available in this CCH Tax Briefing.

“Although the legislation received strong bipartisan support in the Senate, its future passage in the House isn’t a sure thing,” said Wolters Kluwer, CCH Principal Federal Tax Analyst, Mark Luscombe, JD, LLM, CPA. “Supporters claim the issue is about fairness and that Internet sellers shouldn’t enjoy an unfair advantage, but critics say it amounts to a tax increase.”

State Sales Tax Breakdown

Overall, 45 states and the District of Columbia currently have a sales tax. Sales tax is generally imposed on retailers who collect it from consumers when they make an in-state purchase of an item, or in some instances a service. Use tax applies when a consumer makes a purchase from an out-of-state retailer for use in their resident state. Generally, if the out-of-state retailer does not collect the use tax, the consumer still owes it to the state department of revenue.

However, many consumers are unaware of their obligation, even though more than one-half of states include directions with their income tax returns advising taxpayers on how to report and pay the tax.
 
As a result, states are projected to be losing billions of revenue dollars annually from uncollected use tax. The National Conference of State Legislators estimates that in 2012 states collectively lost $23 billion in revenue from uncollected sales or use tax.

“Although there is some likelihood that federal legislation will be enacted, many states have not waited,” said Wolters Kluwer, CCH Senior State Tax Analyst Carol Kokinis-Graves, JD. “More than one-half have proposed or have already enacted legislation requiring remote sellers to collect use tax from consumers and further proposals are expected in 2014.”

More States Enacting “Amazon” Laws 

In the absence of federal legislation, states continue to press ahead with their own laws.  Collectively, these state-initiated remote seller collection laws require online retailers (such as Amazon.com) to collect state use tax in circumstances in which the remote seller has some type of connection with the state, albeit not a physical presence.

New York enacted its click-through nexus law in 2008. Amazon.com and Overstock.com challenged the statute, but the New York Court of Appeals held that online retailers who sold their products solely through the Internet failed to demonstrate that the statutory provision that required out-of-state Internet retailers with no physical presence in New York State to collect sales and use taxes was unconstitutional – under either the Commerce Clause or the Due Process Clause. Ultimately, the U.S. Supreme Court, in December 2013, denied the requests of Amazon.com and Overstock.com to review that ruling.

Once the states began to enact their own laws to address the taxation of remote sales, the final arbiter on the issue would have to be either the U.S. Supreme Court or Congress. The refusal of the U.S. Supreme Court to review the New York cases involving Amazon.com and Overstock.com now paves the way for Congress to act. Failing that, states will likely continue to enact such “Amazon” laws or go on losing revenue from uncollected taxes.

According to Kokinis-Graves, the broader nexus provisions already enacted by 23 states generally fall into two categories:

  • Click-through nexus provisions generally require online retailers to collect and remit use tax if they enter into an agreement under which an in-state person, for a commission, refers potential purchasers to the retailer, whether through an Internet-based link or a website, provided certain total cumulative sales thresholds are met; and
  • Affiliate-nexus provisions generally require online retailers to collect use tax if they have an affiliation with a company doing business in the state.

States following one or more of these nexus rules include: Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Minnesota, Missouri, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Texas, Utah, Vermont, Virginia and West Virginia. The Vermont provisions are not yet in force, however.

Additionally, several states have reached an agreement with Amazon under which Amazon.com has agreed to start collecting and has begun doing so. Those states include: Arizona, Connecticut, Indiana, Massachusetts, Nevada, New Jersey, Tennessee and Virginia.

“Online retail sales are projected to grow,” said Kokinis-Graves. “A federal law would resolve the issue for the nation but in the absence of such legislation, states will continue to consider everything in their arsenal to enforce and collect the tax that is due.” 

Some states also require retailers be more proactive in informing consumers of their obligation to pay the use tax. This includes Colorado, Oklahoma, South Dakota and Vermont. Some states may also require that the remote seller provide the state department of revenue with an accounting of the sales made to in-state customers.

To view an updated national map of state sales tax laws, please visit: http://www.cch.com/cchamazontaxmap.pdf.

Proposed Federal Legislation

Under existing law, retailers nationwide are required to collect sales taxes for purchases made in states in which they have a physical presence, or nexus. But they are not required to collect the tax in states where they have no physical nexus based on a 1992 U.S. Supreme Court decision (Quill Corp. vs. North Dakota). However, the Supreme Court also noted that Congress did have the authority to change this policy and enact legislation requiring all retailers to collect sales tax.

Two decades and many proposals later, Congress is still working on a solution. The Marketplace Fairness Act would give states – following the Streamlined Sales Tax (SST) Agreement rules – the authority to require retailers to collect sales tax on online purchases, regardless of nexus. It would, however, exempt small businesses that earn less than $1 million annually from out-of-state sales.

The SST effort is an initiative to simplify state sales tax so that there are common definitions for taxable products and uniform procedures across the states. To date, 24 states have passed laws to abide by SST rules.

Reporting Use Tax on 2013 State Income Tax Returns

While many taxpayers may still not know they are required to pay the tax if it’s not collected by a retailer, 28 states include instructions with their state tax returns for people to report any uncollected use tax and allow them to pay uncollected tax when filing their state income tax returns.

State returns providing use tax collection instructions:

Alabama

Massachusetts

Pennsylvania

California

Michigan

Rhode Island

Connecticut

Mississippi

South Carolina

Idaho

Missouri

Utah

Illinois

Nebraska

Vermont

Indiana

New Jersey

Virginia

Kansas

New York

West Virginia

Kentucky

North Carolina

Wisconsin

Louisiana

Ohio

Maine

Oklahoma

Realizing that taxpayers may not keep track of all their unpaid use tax, some states take extra steps to try to help them comply. For example, taxpayers in California can refer to a use tax table for estimating their use tax liability based on California adjusted gross income for non-business purchases of individual items that cost less than $1,000.

About CCH, a part of Wolters Kluwer

CCH, a part of Wolters Kluwer (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CCH Axcess™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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