In this Research & Commentary, Matthew Glans examines a proposal in Missouri that would impose a use tax on remote vendors with at least $100,000 in cumulative gross receipts from the sale of tangible personal property in the state.
For years, states shied away from implementing internet sales taxes on persons or businesses without a physical presence in the state. However, this all changed in June 2018, when the U.S. Supreme Court upheld South Dakota’s internet sales tax law in South Dakota v. Wayfair, Inc. In effect, the ruling overturned the 25-year-old “physical presence” standard set in Quill Corp. v. North Dakota.
The Wayfair decision upturned decades of sales tax laws and has opened the floodgates for a torrent of new sales taxes that states can impose on online businesses and consumers. In response to the ruling, the Missouri Legislature has considered several bills that would impose a use tax on remote vendors; none have successfully passed into law.
The version currently under consideration in Missouri, Senate Bill 529, would impose a use tax on remote vendors with at least $100,000 in cumulative gross receipts from the sale of tangible personal property in the state. The tax would become effective October 1, 2020. Revenues from the use tax would be deposited in the School Transportation Fund (80 percent) and the County Jail Reimbursement Fund (20 percent).
The bill also requires marketplace facilitators like Amazon to register with the Missouri Department of Revenue and collect and remit these sales and use taxes. Like many states, Missouri’s sales and use tax system is both complex and volatile, with more than 2,200 local taxing bodies, many with multiple taxes and rates.
From onerous licensing laws to heavy fees and burdensome regulations, small businesses already face numerous economic disadvantages. Adding a new internet sales tax would only increase the strain on small businesses. According to the Tax Foundation, there are more than 10,800 sales tax jurisdictions in the United States.
In order to address some of the complexity and variety of sales tax rates across the state, the bill also requires the Missouri Department of Revenue to build both a downloadable electronic database of taxing jurisdictions and tax rates as well as a mapping feature for use tax information. Although these changes can help online sellers navigate this quagmire, it remains very difficult to properly allocate the various sales tax levies—especially when rates fluctuate frequently.
Applying sales taxes to internet transactions would produce significant consequences. First, the power state governments wield over retailers outside their borders would dramatically expand. Second, since individual states have very different definitions and rules on sales taxes, confusion and uncertainty for out-of-state buyers and sellers is inevitable. Supporters of online taxes argue these taxes are needed to restore a competitive balance between online and brick-and-mortar retailers. However, the imposition of sales taxes on internet transactions would slow the expansion of e-commerce, one of the key growth sectors of the U.S. economy.
Although the majority of states have adopted South Dakota’s thresholds for their new tax laws, others have chosen to expand the threshold to exempt a larger number of small businesses. Alabama, Connecticut, Georgia, and Mississippi have set their threshold higher, at $250,000. Meanwhile, in Massachusetts and Tennessee, the threshold is $500,000. If a state chooses to impose an internet sales tax, it should set the threshold as high as possible. This would protect small businesses, which are the backbone of most economies.
Weakening the physical presence standard for sales taxes reduces states’ accountability to taxpayers. Consumers, who ultimately bear the burden of added costs, are the real losers in this scenario. Allowing one state to tax a resident of another state represents an expansion of state taxing powers, which logically end at the state’s borders.
Although the ideal approach to internet sales taxes is to avoid them altogether and stop forcing out-of-state businesses to serve as government tax collectors, Missouri legislators can limit the negative effects of these laws. Missouri lawmakers should increase the sales tax threshold as high as possible; under this revised threshold, the tax is less likely to impede economic activity, especially among small businesses.
The following documents examine state internet sales taxes in greater detail.
What Does the Wayfair Decision Really Mean for States, Businesses, and Consumers?
In this “Q&A,” Joseph Bishop-Henchman of the Tax Foundation discusses the Wayfair decision and the potential effects it could have on states.
Understanding an Internet Sales Tax
Jessica Melugin of the Competitive Enterprise Institute examines the effort by states to expand their internet sales taxes to draw more revenue from taxpayers. Melugin argues in favor of the origin approach of taxation, a sales tax system where the sales tax is determined based on where the product was sold.
Taxes on Remote Sales
This election brief from the Kem C. Gardner Policy Institute at the University of Utah examines the complexity of online sales, including the legal context and the growth of online sales, and provides some policy options for consideration.
Research & Commentary: Internet Sales Taxes
This Heartland Institute Research & Commentary on internet sales taxes explains how taxing the internet hurts business and fails to bring in the revenues proponents hope for: “The new tax-remittance burden, however, would fall on online retailers. It would add to their costs and could demolish one of the last remaining redoubts of vibrant economic enterprise—the last thing any state needs during a deep recession.”
An “Original” Solution to Taxation of Online Sales
Writing for the American Legislative Exchange Council, Andrew Moylan discusses the origin-based sourcing rule for internet sales taxes and explains how it solves many of the problems created by destination sourcing: “Perhaps the most important advantage of origin sourcing, however, would be the infusion of tax competition it could engender. Under such a system, businesses would have an incentive to invest in lower-tax jurisdictions so as to attract price-conscious customers.”
States Already Can Tax Out-of-State Purchases, but Rarely Enforce those Laws
Michael S. Greve of the American Enterprise Institute considers an overlooked issue in the internet sales tax debate: the often-unenforced use tax. Currently, if a product is purchased from a “remote” seller with no contact with a consumer’s state, the sale is not “tax-free”—the consumer owes a “use tax” equivalent to the local sales tax. Many states do not enforce this tax.
Marketplace Fairness: Leveling the Playing Field for Small Business
In written testimony before the U.S. Senate Commerce, Science, and Transportation Committee, Kelly Cobb of Americans for Tax Reform discusses remote-state sales tax collection and physical presence in light of the oft proposed Marketplace Fairness Act. “The effects on taxpayers of the Marketplace Fairness Act and similar legislation would be dramatic,” Cobb said. “From a taxpayer perspective, any bill that touches remote sales taxes must preserve the physical presence standard and protect consumers on net from a higher tax burden. Unfortunately, the federal online sales tax bills miss the mark widely on both fronts.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics visit The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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