It isn’t news that states are looking to improve their revenue sources and that sales tax is a primary target. Many states, including Georgia, have entered into the Streamlined Sales and Use Tax Agreement, (SSUTA) which is a cooperative approach among 44 states and the District of Columbia to simplify sales tax compliance and provide mutual support in sales tax enforcement.
Among other things, the SST (Streamlined Sales Tax) Governing Board was planning to propose a separate set of sales tax rules for digital commerce so that internet sales would be at a higher rate than tangible goods. The Digital Goods and Services Tax Fairness Act of 2011 is in an ill-advised move in my opinion because it would prima facie be discriminatory, although maybe not unfair, and will likely die on the vine.
There are other proposals for taxing e-commerce like the Main Street Fairness Act of 2011 (H.R. 5660) and the more recent Marketplace Equity Act of 2011 that seek to establish enforceable rules requiring businesses to pay sales taxes in states based on where the goods are shipped. The MEA contains a small business exception for sellers with less than $1,000,000 or less in total sales or $100,000 or less in total sales in a particular state. The MSFA has an exception as well but it is not as clearly defined – allowing individual states to determine the definition. Both proposals are aimed at leveling the playing field between brick-and-mortar businesses and non-sales-tax-paying e-tailers and, of course, raising much needed sales tax revenues for the states. The only real difference between the two proposals is that only members of the SSUTA benefit from the remote seller provisions of the Main Street Fairness Act.
It is also interesting to note that Amazon, the 800 lb gorilla of internet retail, ceased warehousing and distribution from Texas over a disputed $269,000,000 state sales tax bill. Amazon offered to create 5,000 new jobs in the state if Texas would let them off the sales-tax hook for 4 ½ years. Texas said no. (South Carolina said, “Yes”.) Maybe Amazon believes that there will be a can’t-argue-with federal sales tax within 5 years. They publicly support such a tax.
Income and Commercial Activity Taxes
States are actually gaining ground in the tax battle using the doctrine of “economic presence” to establish nexus for collecting taxes. Cases such as KFC Corp. v. Iowa, W.L. Gore & Assoc. v. Maryland, and L.L. Bean v. Ohio (unresolved), all were/are battles for determining the constitutionality of "bright line presence" standards that impose taxes - regardless of tax type - on out of state companies that lack a physical presence in the State. The states argue that they provide a service – a regulated and orderly marketplace - justifying their claim for compensation (i.e., taxes and franchise fees). The U.S. Supreme court recently turned down KFC Corp’s request for certiorari, which means that KFC will have to pay income taxes in Iowa based on sales to franchisees within the state. At BCC we have a number of clients that sell to customers in Ohio and have been assessed the Ohio Commercial Activity Tax (CAT). The CAT is a tax based on, among other things, a company’s gross revenue earned from dealing with Ohio customers. Along with the CAT assessment letter was a list of court cases that Ohio has recently won related to it’s CAT. Clearly, Ohio wants taxpayers to know that they are serious about collecting the tax and hopes to avoid spending their tax dollars on legal fees. More and more states are looking into similar tactics and using penalties and interest to encourage “voluntary” compliance.
The Bottom Line
As state revenue authorities become more creative and successful in their search for revenue more companies are going to have to begin filing income tax, franchise tax, and sales tax returns in other states. Generally, the tax is simply moved from one state to another. Most states have a reasonably fair method for giving credit for taxes paid to other states so that there is no double taxation. Should you file in another state before you get a notice? As usual the answer is “it depends”. In my opinion, it depends on the amount of tax at stake and how obvious your connection to the state. It is always best to be informed so that you can take proactive steps and possibly save future headaches.