Sales tax in a digital age

calculator-1019936_960_720I shall open with something of a circular observation: If it weren’t for digital technology, there could be no Internet commerce. 

Lest you think I’m being too obvious, I’m not talking about payments via wearables, portables, laptops, or desktops, vital though they are. I’m talking about a morass that would be all but impenetrable without a computer assist. 

Namely, sales tax.

As with excise taxes, the burden of collecting and remitting sales tax has traditionally fallen on merchants. That’s a simple matter if you sell only to locals from only one, physical, retail location. But now that technology allows the smallest merchant to sell in and collect payment from any location in the world, managing sales tax becomes a bit more daunting. 

It’s not a mere matter of remembering that Alaska, Delaware, Montana, New Hampshire, and Oregon have no state sales tax while keeping track of sales tax rates in the other 45. Thirty-eight states allow individual localities to pile on additional sales taxes of their own. Even Alaska and Montana allow localities to impose sales tax despite imposing none at the state level. The result is a nation that is a mishmash of myriad, distinct, geographically-linked sales tax zones.

Just to preclude any easy solutions, what is and is not subject to sales tax also varies by locality and even within them. Some tax food, some do not. Some tax services, some do not. Some tax items bound for extra-state delivery, some do not. Some have reduced rates for certain kinds of items and increased rates for other kinds. Moreover, counties may impose a sales tax, and so may cities or towns within them. 

Here’s Avalara’s summary of sales tax for my home state of Utah:

The Utah (UT) state sales tax rate is 4.7%. Depending on local jurisdictions, the total tax rate can be as high as 8.7%. Local-level tax rates may include a local option (up to 1% allowed by law), mass transit, rural hospital, arts and zoo, highway, county option (up to .25%), county option transportation, town option (generally unused at present by most townships) and resort taxes. All total, there are 17 types of possible tax jurisdictions that may be levied in Utah.

That’s just one, not particularly populous state—“with 17 types of possible tax jurisdictions.” 

According to TaxFoundation.org:

The five states with the highest average combined state and local sales tax rates are Tennessee (9.47 percent), Louisiana (9.45 percent), Arkansas (9.43 percent), Washington (9.17 percent), and Alabama (9.14 percent).

That leaves interstate sellers with a lot more to worry about than 45 geographic locations. There are other rules, too, having to do with volume and verticals. So it is that Intuit advises, “if you sell your products online, you may—or may not—have … sales-tax-collection duties.” Oh, and you never know when a state or locality will revise its rates.

In short, when it comes to interstate sales tax, there’s a lot to keep track of.

The problem existed in the old mail-order catalog glory days, albeit on a smaller scale. It grew as more and more catalog merchants entered the arena, but states had little luck getting out-of-state merchants to do their collecting for them. North Dakota pushed the issue all the way to the United States Supreme Court, which in 1992 ruled in Quill Corp. v. North Dakota that states could collect sales tax only from businesses with a physical presence within their borders. It was an arguable incentive for mail-order businesses not to open outlet stores and not to build satellite warehouses.

But the Internet—and I bet you’ve heard this before—changed everything. Unless you’ve been napping since 2005 when the term Black Friday was coined, you’re probably aware that online sales have mushroomed. Already not-trivial losses in sales tax related to interstate sales mushroomed with them. 

In 2017, it was South Dakota that pushed an interstate sales tax case up the ladder. It fared better than its neighbor to the north. A little over a year ago, the United States Supreme Court handed down its South Dakota v. Wayfair decision. The Balance Small Business summarizes the ruling this way:

A state’s ability to tax transactions is based on the concept of tax nexus, meaning that the seller has a presence in the state. Your company can have a nexus if it is doing business in the state, including:

  • Having a physical office or a place where you conduct business (in your home, for example),
  • Selling or shipping products to a buyer in the state,
  • Having a distribution center, like a warehouse or storage area,
  • Having employees who work in the state, including independent contractors, salespeople, representatives, or agents

Note the second bullet, “Selling or shipping products to a buyer in the state.” The ruling kept the requirement of a physical presence for collecting sales tax, but it broadened the definition of “presence.” Sold something in another state? That’s a presence.

Sale tax has been around for almost 90 years. It was in 1930 that Mississippi and Kentucky became the first states to impose a broad-based sales tax. Although the United States levies product-specific excise taxes—on, for instance, tobacco, alcohol, gasoline, and tires—broad-based sales taxes remain a state thing. For now. 

Leave a Comment