Recently we’ve been hearing calls for everyone to pay their fair share of taxes. One regular target: online retailers, who are being criticized for failing to collect and remit sales tax. But, like many questions of tax policy, this one is more complicated than headlines might lead you to believe.
So, is it fair to require online retailers to collect and remit state sales tax? The short answer: yes. The long answer: yes, but only if there’s a new system that makes doing so a manageable process. Unfortunately, we’re not quite there yet.
In addition to states’ efforts to maximize tax revenue, the push to collect online sales tax comes from a desire to help traditional “brick and mortar” businesses to fairly compete against online retailers. Traditional retail outlets argue that the lack of online sales tax collection means that they’re constantly being undersold by large, online retailers. Be careful though, online retailers include businesses of all sizes, ranging from small “mom and pop” shops to giants like Amazon.com.
While traditional small businesses tend to do business in only one or a few states, online retailers often sell to customers in multiple, or even all 50, states. The cost of collecting and remitting sales tax as required in a single state may be reasonable for a small retail business, but the cost of doing so in 40+ states could be crippling.
Currently, in order for an online retailer to collect and remit state sales tax, that retailer needs to know the tax laws for each jurisdiction where sales are made. Because we define the sales location as the location of the customer, online businesses need to track which items are subject to sales tax, what amount of tax must be charged, which forms must be completed and when taxes must be remitted to each state.
Keep in mind that there isn’t one central location for this information. Therefore, the ability to track and comply with all these rules and regulations is beyond the capacity of many small, online retailers.
With this current, complex situation, how can we ask online businesses to collect sales tax? Ultimately, the answer lies in making an online sales tax system that’s easy to comply with. This system must be both pro-government and pro-business.
There is already an attempt to do so: it’s called Streamlined Sales Tax. The Streamlined Sales and Use Tax Agreement is the result of the cooperative efforts of many state and local governments and the business community. Under the agreement, businesses agree to collect and remit sales tax and states agree to abide by standard sales tax rules (such as those defining which items are subject to tax) and to offer amnesty on all past due taxes, penalties and interests. To date, 24 states have enacted legislation adopting some or all parts of the agreement.
While the success of this particular system remains to be seen, some type of simple, uniform and centralized system for collecting and remitting sales tax is necessary. It’s not that taxes shouldn’t be paid on online purchases; it’s that it shouldn’t be so hard to decipher, collect and remit sales tax on online purchases.
In sum, it’s fair to expect internet retailers to collect and remit sales tax, but only if the system for doing so isn’t an impediment to their business. This is a problem of the digital age, but it has a simple, digital solution. With standardized tax codes, central collection and e-filing, it shouldn’t be difficult to create an online sales tax system that’s fair to businesses and governments alike. As we all know, this will be easier said than done.
Contact Rea & Associates
Does your business sell online or across state borders? Wondering if you’re in compliance with those states sales and use tax laws, and how changes to those laws could impact your business? Contact Rea & Associates. Our state and local tax professionals will keep you informed and compliant.