Distance selling tax: a federal law could solve some uncertainties and improve the whole system


What the GAO found

The 2018 U.S. Supreme Court decision, South Dakota vs. Wayfair, held that states could require out-of-state (or remote) businesses to collect sales tax even without a physical presence, such as an in-state store or warehouse. States reacted quickly with new distance sales tax requirements, resulting in a complex patchwork of widely varying requirements. For example, states have established different monetary and transactional (or economic nexus) thresholds exempting certain small businesses from distance sales tax requirements and different rules for calculating those thresholds.

Sales tax economic nexus thresholds for distance sellers, as of September 2022

Based on state-reported data, the GAO estimates that nationwide distance sales tax collections in 2021 will be approximately $30 billion. Firms reported incurring software costs to expand their multi-state tax collection capabilities, audit and assessment costs associated with increased exposure to tax jurisdiction, and costs to keep abreast of legal requirements in multiple jurisdictions.

The GAO has found that the overall remote sales tax system raises concerns about all three criteria of a good tax system. For instance:

  • It is an accepted principle of fairness that similarly situated taxpayers receive similar treatment. GAO found that post- Wayfair multi-state sellers have to deal with the patchwork of different requirements in the tax jurisdictions with which they have an economic connection, while brick-and-mortar sellers generally only have to tackle the requirements of the jurisdictions in which they are physically located , regardless of the states in which their customers live.
  • Economic efficiency is achieved where resources are used to provide the greatest possible benefit or welfare to society. The GAO found that distance sellers changed their behavior due to the need to divert resources from business operations and investments to tax compliance, such as limiting the number of states in which they sell or the amount of sales in certain states to avoid certain states. distance sales tax requirements.
  • Simplicity, transparency and manageability are interrelated but distinct characteristics of a good tax system. The GAO has found that businesses spend significant time and resources on remote sales tax compliance in several states; that the many requirements and variations between tax jurisdictions make it difficult for businesses to understand their remote sales tax obligations; and that administrative costs are borne largely by companies collecting from buyers on behalf of tax jurisdictions.

The GAO has identified various proposals for remote sales tax reform, ranging from incremental to comprehensive. While the comprehensive reform proposals are intended for nationwide adoption, some of the incremental reform proposals may be adopted by states independently of each other or on a broader multi-state basis.

For example, one incremental reform proposal is for a state to adopt a single point of statewide registration, filing, administration, and auditing. One overarching reform proposal is that states be required, as a condition of taxing distance sales, to participate in a collaborative interstate mechanism whereby states agree to uniform standards and centralized processes.

Some states and multi-state organizations have taken steps to implement some of the proposed incremental reforms, but a comprehensive approach has yet to be adopted. While individual state actions may help some businesses comply with a particular state’s remote sales tax requirements, they do not alleviate the multi-state complexities that exist. To date, there is no comprehensive approach in place that addresses multi-state complexities and includes all states seeking to tax distance sales.

In addition, substantial uncertainty currently exists as to the extent to which distance sales taxation is legally permitted for states and localities. For example, there is uncertainty as to what connection (or connection) a business must have with a state before the state can require the business to collect sales taxes on its behalf; where distance sales tax requirements violate the Constitution’s prohibition on state laws that discriminate against or impose an undue burden on interstate commerce; and under what circumstances locally administered remote sales tax requirements are constitutionally permitted.

One of the effects of this uncertainty is that legal disputes involving state and local authorities to require the collection of sales tax have developed. Such disputes can be costly for parties to litigate and can lead to protracted and uncertain outcomes for all parties involved. Without a comprehensive approach in place, courts must deal with these issues on a case-by-case basis.

While the right of states to levy taxes and empower their localities to do the same is a well-founded tenet of state sovereignty, under the Commerce Clause of the Constitution, Congress has the power to regulate interstate commerce. The Supreme Court said Congress has the “ultimate power to resolve” distance sales taxation issues. Federal legislation that sets national parameters for state taxation of distance sales could help resolve multi-state uncertainties and complexities and improve the overall system.

Why GAO Did This Study

Electronic commerce (e-commerce) sales have grown rapidly over the past quarter century. However, until recently, states could not require e-commerce and other businesses operating out of state to collect taxes on sales to residents of their states unless the business had a presence. physics in the state.

Two fundamental objectives of tax policy are (1) to generate sufficient revenue to finance planned public expenditures, and (2) to do so in a manner consistent with three long-standing and widely accepted criteria for a good tax system: equity; economic efficiency; and a combination of simplicity, transparency and manageability. In the more than 4 years that have passed since the Wayfair decision, concerns were raised about the extent to which the overall distance sales tax system complies with these criteria.

The GAO was asked to consider the effects of expanded state authority to collect remote sales tax. This report examines (1) the current landscape of state distance sales tax requirements, (2) the number of businesses subject to these requirements and the amount of revenue states have generated as a result, (3) the types of costs businesses have incurred in complying with these requirements, and (4) the extent to which the overall distance sales tax system aligns with the criteria of a good tax system.

To carry out this work, GAO administered a survey to revenue agencies in the 45 states with statewide sales tax and the District of Columbia. Forty-three states and the District of Columbia responded, for a response rate of over 95%. GAO also interviewed several organizations representing states and businesses, as well as companies engaged in e-commerce and multistate taxation, selected to represent a wide range of perspectives.


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