How Evolving Consumer Habits Impact Sales Tax Collection and Compliance
From increases to borderless online sales to changes in category spending, most state tax regulation has not kept pace with major shifts in consumer habits.
Recently, Danetha Doe, owner of her consulting practice and host of the Future of Accounting podcast, interviewed Scott Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara, on how evolving consumer habits and a changing economy impact U.S. sales tax collection and compliance. In this interview, Peterson explains how these changes have presented unique challenges to indirect taxation, including sales tax, per unit tax and value-added tax (VAT).
Doe: There’s a lot of talk about with regard to indirect tax, particularly around e-commerce. For example, companies such as Amazon are allowing sellers to move from brick-and-mortar to online, either completely or as a hybrid. Why has indirect tax become such a hot conversation?
Peterson: Because you and I stopped going to stores. We didn’t stop shopping, but we stopped going to the store. However, sales tax is, by and large, still collected in the store, so states are thinking, “Why isn’t my sales tax growing like it used to grow?”
Doe: So, states are seeing more shoppers move online and getting their items sent to them in a box. I’m laughing because I just got one of those boxes this morning. What impact have states felt from that shift – this consumer trend?
Peterson: In 2015, three years after the last recession ended, Utah reported that sales tax collections had still not returned to the level they were before the recession. That’s a concept that’s never existed in this country, at least not in the modern era. For most states, it’s not because of a decrease in sales or transactions happening. The economy is bigger, but the states’ collection of sales tax hasn’t kept pace.
Doe: How is technology now shifting the way states look at defining nexus?
Peterson: Some of the changes to how states define nexus is because of technology, and some of it isn’t. One change came from a recent evolution of the way online business is conducted through affiliate links. You’ve been to a lot of websites and you may notice the sites link to other company websites.
Even a website that’s not trying to sell you a product will likely still have links to other sites that are selling products. You may see a link to Amazon and a link to another online store. If you click on that link, it will take you to that company and then you can buy something from that company.
When the internet began, big box stores such as Wal-Mart and JCPenney wanted to get involved in this internet thing, so they created websites. Those retailers separately incorporated their sites and then made the argument that even though they had physical stores inside a state, the physical stores did not create a connection for the internet company, their online store.
Because they were separately incorporated, they had separate boards of directors, claiming they were different companies, even though they were all owned by the same corporation. This is a non-technological thing that was, and still is, just a new way of operating in an evolving economy.
Doe: How can accountants stay on top of these changes and best inform their clients?
Peterson: Anyone going into this business needs to understand the distinction between value-added tax and sales tax. I don’t know if the United States will ever switch or shift to value-added taxes, but you can’t be in this business today without understanding the distinction because you’re going to have clients that do business all over the world.
In the future, more things are going to be subject to sales tax. For example, CPAs and accountants are going to have to understand how tax applies to the sale of skis and the sale of ski lift tickets. In today’s digital world, what if you buy the lift ticket through Groupon for a resort area in Colorado that has five different ski resorts spanning five different counties in Colorado through Groupon – and Groupon is headquartered in Chicago? Will each resort have a different sales tax code?
Doe: How about buying an epic pass that gives you access to multiple states?
Peterson: Absolutely. Today’s accountant has to understand how the way we buy things and the way they are bundled together is really complicated and borderless – and, to date, the underlying tax hasn’t changed to encompass that.
The underlying tax hasn’t changed a bit, but the way we can buy things and what we can buy is so different today than it was 10 years ago, and certainly radically different than it was even 20 years ago.
Doe: If I’m looking at it from a state perspective and there’s a shift in the way consumers are shopping, does that mean the states need to rethink how they approach their business of collecting tax from sales, or does it have to be a change in tax law for them to be able to capture this expanding economy?
Peterson: That’s a great question. For someone like me who has spent his entire career trying to get people to change, it’s an amusing question because getting people to change their ways is virtually impossible. Consumer behavior and the economy have changed in two major ways, but the process for collecting sales tax hasn’t changed.
The first major shift is that you and I spend more money on services than we used to, and most states don’t tax services under their sales tax laws. As opposed to goods, we now spend more of our money on services such as entertainment, repairing our car and dry cleaning than we did 30 years ago. Yet, the sales tax collect process is exactly the same today as it was 30 years ago.
When sales tax was first created, the economy was different and how people spent their money was different. Sales tax was a tax on tangible personal property or goods because all that was sold was tangible personal property. There wasn’t a dry cleaner or any kind of service like this.
In addition to spending on new activities and new technology, there are new ways to manage the goods we buy. For example, we no longer have to buy a new car when the old one breaks; we now have it fixed. We don’t have to go to a movie theater and buy a movie ticket; instead, we download a movie from home. Yet, sales tax collection, for the most part, hasn’t caught up with these new spending habits.
The second thing that’s changed about the economy and consumer shopping habits is the internet’s acceleration of our ability to shop in a borderless way. You can live in one state and easily buy something from a company in another state ... but Tennessee, for example, can’t close its borders to control tax collection.
The state can’t put customs agents on the interstate to say, “If you want to bring something into Tennessee, you’ve got to pay use or sales tax before you can bring it in.” We don’t have that option. Interestingly, countries and provinces can do that. The United States can do that, but North Dakota can’t. The states, and their power to collect or enforce sales tax law, are limited by their boundaries, yet commerce has no boundaries.