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Will There Be Limits to States' Online Sales Tax?

Sep 18th 2017
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With the increased level of marketplace sales, Congress has begun considering proposals that protect the tax revenue due from online transactions -- some of which could make taxing online sales of these marketplace sellers more difficult.

What does this mean for your accounting practice? With the shift from physical nexus to economic nexus, accountants must stay abreast of the continually changing sales tax environment and government regulation to best support and inform your ecommerce clients as well as distinguishing themselves as trusted sources for potential marketplace selling clients.

In recent years, the surge of ecommerce sales has broadened the definition of nexus from one of physical nature to that of economic nexus. That is most notably true for businesses that use a marketplace provider, such as Fulfillment by Amazon (FBA) or eBay, to fulfill orders on their behalf.

A Congressional committee recently held a hearing on H.R. 2887, known as the No Regulation without Representation Act.  According to the sponsor, this legislation would put into federal law a requirement that a business must be physically present in a state before that state could make the business collect sales tax. 

Physical presence is the nexus standard established by the U.S. Supreme Court in their 1967 and 1992 court cases. The sponsor introduced the legislation because since the 1992 Supreme Court decision, states have been actively thinking up new ways to change or eliminate physical presence as the standard.

States oppose this legislation as they do whenever Congress attempts to regulate state activity. State opposition is only part of why there are few examples of Congress regulating state taxes.

Federalism (the sharing of power between local, state and the national governments) is one of the bedrocks of our constitutional system of government. The concept of federalism works very well when each level of government goes about its daily work exercising its authority to manage its responsibilities.

On occasion, however, the system breaks down as one level of government attempts to regulate the activity of a level below them. Local governments have little constitutional protection and are often subjected to mandates from their state. 

State governments are protected from Congress by the 14th amendment to the US Constitution, which grants all power to the people or the states unless expressly granted to the national government. Congress has the power to regulate interstate commerce.

There are dozens of court decisions defining that authority, but Congress’s power does not extend to regulation of intrastate commerce.  In the past, when Congress felt the need to impose its will on certain activities - regulating the drinking age, the speed limit or educational standards - it did so through the power of the purse. 

For example, Congress does not have authority to pass a law establishing 21 as the national drinking age, so to affect change it passed a law withholding federal money to any state that was unwilling to establish 21 as the drinking age.  This and other examples show that Congress can regulate wholly instate activity by attaching that requirement to the receipt of federal funds.