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The process will be more of a struggle in some states than others.
State and local governments, responding to a June U.S. Supreme Court decision, have begun to collect sales taxes from out-of-state retailers. But depending on tax systems already in place, the process will go much more smoothly in some states than in others.
Analysts expect new rules being drafted around the country in response to the South Dakota v. Wayfair Inc. decision to deliver billions of dollars annually to state coffers. They will also force retailers to navigate an untested patchwork system stretched across the nation’s 12,000 state and local taxing districts.
The high court decision was meant to level a playing field, where for decades sales tax laws that applied to brick-and-mortar stores often didn’t apply to online retailers. State and local governments saw an end to years of lost revenue from the booming online retail sector. Offline retailers celebrated the ruling as an overdue corrective.
The tax law at the heart of the Wayfair case was passed by South Dakota lawmakers in 2015 and has been used as a model in other states in part for its simplicity. The law requires all merchants doing business in the state to collect a 4.5 percent sales tax if they do more than $100,000 in annual sales or conduct more than 200 retail transactions. South Dakota began collecting tax from remote sellers on the first day of November 2018.
“We definitely feel ready,” Wade LaRoche, spokesman for the state’s Department of Revenue, told Bloomberg News on the day the law took effect. “We have already issued sales tax licenses to hundreds of remote sellers… [and none of them] have notified the department of any complications.”
New Jersey, North Carolina and South Carolina also started collecting sales tax from remote sellers in November. Bloomberg reported that, of the 45 states that impose sales taxes, 23 are now taxing remote sellers.
When it comes to taxes, however, “level playing field” is always a relative term.
As the Colorado Sun reported on Monday, Centennial State officials and businesses staring down new remote-seller tax rules scheduled to launch in December will be wading into a much more complex system than the one set up in South Dakota.
The Colorado fiscal system has been wound into a tangled ball by the small-government Taxpayer Bill of Rights, or TABOR, voted into the state constitution in 1992, and a series of subsequent TABOR “fixes” that have put in place various budget-boosting workarounds. Tax rules and constitutional stipulations overlap and often clash at different levels of government across the state. As the Sun points out, a 2018 report by the Council on State Taxation found that the Colorado tax system is the most difficult system in the nation for businesses to navigate.
Indeed, according to the Sun, tax experts believe Colorado’s complex system may well test the limits of the Supreme Court’s Wayfair ruling by placing an “excessive burden” on interstate businesses.
The Sun’s Brian Eason described state tax and budget laws arching over hundreds of special tax districts located within dozens of city tax districts themselves located within tens of county districts, writing:
Colorado at one point had a dizzying 756 possible combinations of sales taxes for businesses to collect depending on their physical location…
Seventy-one home rule cities collect their own sales taxes, requiring companies to acquire separate tax licenses to do business there. In some cases the tax base can differ from one jurisdiction to the next, meaning a product that’s subject to taxes in one place may be exempt from taxes in another… [And] different places don’t even agree on definitions for common [product] terms like “groceries” or “computer equipment.”
Those are the kind of complications that fuel criticism about the speed with which cash-hungry states are acting to put the new sales tax laws and procedures in place.
“The tax software needed to integrate across a vendor’s system take years—not months or weeks,” Hamilton Davison, president and executive director of the American Catalog Mailers Association in Providence, Rhode Island, told Bloomberg. “I can’t think of any instance in my 20 years in this industry where retailers have been asked to take such a sharp and sudden turn in the way they do things.”
In one example of the rush, Louisiana could end up pushing back the January 1 start-date for collecting its remote-seller taxes. The Advocate reported this week that the commission established earlier this year by the state legislature to develop a system to collect taxes is still working out significant details, including how to define the term “remote seller.”
Louisiana allows its roughly 370 local jurisdictions to act independently in deciding how they collect sales taxes. How the commission defines “remote seller” could mean the difference between businesses simply filing returns and audits with the state or with all of the local districts in which they do business, the newspaper reported. The commission is also still hammering out a tax-collection enforcement mechanism and has yet to choose a software provider for remote-retail tax-filers to use.
A problem in many states is that retailers are being forced to comply with the new tax systems during the fourth-quarter holiday season—their most busy, and profitable, quarter of the year.
But those holiday revenues are exactly what states aim to collect.
In Illinois, where years of failed budget negotiations have earned the state the lowest credit rating in the country, officials are counting on collecting $150 million from new remote sales tax laws. Michigan and New Jersey have each similarly included estimates of more than a hundred million dollars of new remote sales tax revenues in their current budgets, according to Reuters.
The U.S. Government Accountability Office in November reported that state and local governments last year could have collected $8.5 billion to $13.4 billion all together if they could have taxed remote retailers the way they can now.
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John Tomasic is a journalist who lives in Seattle.