PPF Pearls: Wisconsin and the Internet sales tax

Yesterday the Wall Street Journal reported that tight state budgets have resulted in several governors adopting Internet sales tax agreements with online retailers that require these sellers to collect state sales taxes at the time of purchase, even if they do not have a “brick-and-mortar” presence in the state.

Such agreements ensure these states receive the sales tax they are due; relying on each consumer to report and pay the sales tax owed often leaves state coffers short. For example, self-reported taxes on online purchases (use taxes) were collected from just 29,200 Wisconsin tax filers in 2009, totaling $1.72 million. This represents less than one percent of the total sales and use tax paid in that year. A 2009 University of Tennessee study projected Wisconsin would lose $126.1 million in state and local sales taxes in 2011 and $142.1 million this year from unpaid sales taxes on Internet purchases. Wisconsin’s 5% state sales tax totaled $4.1 billion in 2011, making up one-third of the state’s general purpose revenues, second only to the personal income tax.

While the recent agreements forged by governors help bolster the revenues of individual states, they result in a patchwork of policies across the country. This patchwork complicates business practices for online retailers and puts them in a different competitive stance with physically-present retailers in each state. The result is that a Wisconsin customer of Amazon.com, for example, would not have the state sales tax added to the cost of his or her purchase, but a resident of Kansas, Kentucky, Texas, or any other state with a collection agreement would. In addition, it means an item sold in a physical store in Wisconsin costs more at the time of purchase than the same item sold online, even if they are priced the same.

Instead of seeking tax collection agreements with individual Internet retailers, Wisconsin has joined several other states in looking to Congress to pass legislation allowing states to require online sellers to collect state sales tax. In 1992, the Supreme Court ruled in Quill Corporation v. North Dakota that retailers must have some sort of physical presence in a state before they can be required to collect state sales tax on behalf of that state. Three bills currently under consideration in Congress would tackle Quill’s prohibition by voiding the requirement of a physical nexus.

The Main Street Fairness Act, proposed by Democrats, would allow states that have joined the Streamlined Sales and Use Tax Agreement (SSUTA) to require online retailers to collect state sales tax at the time of purchase. The SSUTA, which seeks uniformity among states by standardizing the definitions of products and taxable items, as well as standardizing and simplifying tax calculations and collection procedures, has a long history in Wisconsin. In our 2000 white paper on tax policy for the new economy, the Forum noted that Wisconsin served as a co-chair of the effort, which began in 1999 with the help of the National Governors’ Association and the National Conference of State Legislators. It wasn’t until 2009, however, that Wisconsin passed the state legislation adopting the standardized definitions required to become a SSUTA member.

The second bill, the Marketplace Equity Act, will be the subject of a hearing in the House Judiciary Committee on July 24. It has been introduced in both the House and Senate with bi-partisan support and appears to be gaining momentum. This act proposes that states wishing to require online tax collection adopt a set of simplified tax rules that are somewhat similar to the SSUTA standards. Some online business groups are worried, however, that by not aligning directly with the SSUTA, the standardization and simplification goals will not be met, as the 22 SSUTA states will be reluctant to pass new and different standards. These states could choose to continue to seek agreements with individual retailers, causing big headaches for national online retailers who would be subject to many differing state tax rules if the act were to pass.

In response to these critiques, a third bill, the Marketplace Fairness Act, has been introduced in the Senate with bi-partisan sponsors. This bill would allow states who are members of the SSUTA to require online sales tax collection, but would also allow non-member states to do so as well, as long as they adopt an alternative set of simplified taxation standards.

Opponents of all three bills argue that by eliminating the nexus requirement for sales and use taxes, Congress would be at the precipice of a slippery slope that could result in all types of new taxes far removed from the activities being taxed. There is also an argument that the requiring sales tax collection by online retailers, even if simplified and standardized, would be so burdensome that it would stifle Internet entrepreneurship.

A May survey by the International Council of Shopping Centers found that 62% of Wisconsin residents polled understand they are supposed to pay a tax on items purchased online, even if the tax was not collected by the retailer at the time of purchase, and that 72% feel having the retailer collect the tax would be easier. In addition, 65% of respondents say they would support a federal law allowing retailers to collect the tax. Until Congress acts, count on Wisconsin’s Department of Revenue to continue to aggressively remind taxpayers that their online shopping sprees are not duty-free.

UPDATE 7/24: More coverage of this issue in the Milwaukee Journal Sentinel http://www.jsonline.com/business/online-retailers-might-have-to-collect-sales-tax-a766ati-163483146.html