What Out-of-State Retail Clients Need to Know Now

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The U.S. Government Accountability Office says in a new report that states could boost their revenues by billions of dollars if they weren’t subject to a 25-year-old court opinion restricting their authority to tax remote retailers.

The states are certainly going to take a closer look at this, and you should, too. Here's why:

Ecommerce Clients Be Prepared

Collectively, states are losing between $8.5 and $13.4 billion dollars each year (about $200 million per state) because they aren’t collecting sales taxes from online sales to customers in their states. In some individual states, the lost revenue is extreme. California, for example, is missing out on as much as $1 billion each year. That’s according to a report from the U.S. Government Accountability Office (GAO), which examines “the effects on businesses and state revenue agencies of legislation that would grant states the authority to require businesses to collect and remit taxes on all remote sales.”

With state and local governments increasingly looking for ways to bolster their depleted budgets, many are pushing for legislation in the U.S. Congress that would enable them to collect taxes on remote sales more effectively. At the heart of the matter is a 1992 Supreme Court (SCOTUS) ruling that has been a thorn in the side of state sales tax collection efforts, but that held out a ray of hope.

The Supreme Court’s decision noted that Congress has the power to regulate interstate commerce and could enact legislation allowing the states more leeway in collecting taxes on these out of state sales. On the national level, laws governing ecommerce sales tax collections have not been revisited since 2000, when it was found that “the data available at the time were not well suited” for regulating ecommerce.

Since that time out-of-state sales, has greatly expanded. With more sales taking place between sellers and buyers in different states, states have seen sales tax collections diminish.

Nexus and Quill

In the 1992 Quill v. North Dakota decision, SCOTUS affirmed a 1967 decision which held that businesses could not be compelled to collect sales taxes on transactions made to customers in states where the seller did not have a significant physical presence, or nexus. The Quill case was heard just prior to the advent of the commercial internet and the revolutionary effect that ecommerce would have on the economy.

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About Scott Peterson

Scott Peterson

Scott Peterson is vice president of US tax policy and government relations at Avalara. Contact him at [email protected].

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