Did you realize when you buy online and aren’t charged any sales tax that it’s not because there isn’t any, or that it doesn’t apply to online purchases? Believe it or not, if you don’t pay sales tax at the point of purchase, you still owe it. Seriously? How is that possible? It’s called “use tax,” and it’s been around since 1935.
Where it All Started
When the Great Depression threw local governments into a tailspin, caused by lost property and income taxes, many states enacted sales tax on all products sold within their borders. Sales taxes would ensure vital public services such as fire and police security. But some states stood on the fence and refused to add that burden to their residents. Of course, buyers flocked to tax-free states whenever possible – especially for big-ticket items – and “use taxes” were put in place as a stopgap measure to close the loophole.
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Essentially, for the past 77 years U.S. citizens were supposed to be paying use taxes (via your annual tax return) to the state in which you lived; based upon any items purchased elsewhere for use in your state. If you’re like most everyone else, you probably had no clue this was the case. It’s not something you hear about on the nightly news – nor do the states come pounding down your door to collect on the few dollars tax you didn’t pay for that teddy bear you bought online for your toddler. The only time the states can really nail down their use taxes is when your purchased items must be licensed – such as vehicles and watercraft – which is no doubt why those fees are so high.
A New Twist
And then, along came catalog sales. Companies without a physical presence (nexus) within a state in which they sold their catalog items were targeted. The states still wanted their use taxes, in this case from firms shipping goods into their states. In 1992 the subject came to a head with Quill Corps v. North Dakota. The U.S. Supreme Court overruled the North Dakota Supreme Court’s imposed taxes in a landmark decision, known as the Quill Decision – which mandates that you must have a physical presence in a state in order to be required to collect its sales or use taxes. The Court did, however, leave the door open by stipulating that Congress could grant the states authority to demand the taxes be collected.
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One Way to Handle It
Next in line came the Streamlined Sales Tax Project (SSTP), enacted by Congress in 2000. It was Congress’ way of placating the states for its continually refusing to burden online companies with tax collection, which might have hurt commerce and ultimately consumers. The SSTP is membership program, in which 24 states have currently enrolled, which allows e-commerce companies to register voluntarily. In return they are given a streamlined and consistent tax structure, supported by certified software applications, which can be integrated with their online carts and accounting packages. Twelve years later, only half the states have adopted the SSTP, leading to further attempts for solidarity to “bring home” the millions of dollars the states are losing each year in sales and use tax revenue.
One Last Stand
In a reaction to continual pressure by the states, Congress took a stand by passing resolution H.Res.95, introduced February of 2011: “That it is the sense of the Senate (and House of Representatives) that Congress should not enact any legislation that would grant State governments the authority to impose any new burdensome or unfair tax collecting requirements on small Internet businesses and entrepreneurs, which would ultimately hurt the economy of, and consumers in, the United States.”
The Home Stretch
Last year four new bills were brought to Congress, to once again push the issue of Internet tax collection. In July of 2011 two Main Street Fairness bills were simultaneously introduced, in the Senate and the House (S.1452 and HR.2701), and are still “in committee” at this writing. Three and four months later the Marketplace Equity (HR.3179) and Marketplace Fairness (S.1832) Acts were proposed as hopeful bi-partisan efforts to put the subject to rest once and for all.
Just prior to the introduction of S.1832, another resolution was passed in the Senate (SRes.309), which reiterated the House of Representative’s stand on H.Res.95. Most likely due to the steadfast positioning of Congress, the Marketplace Equity and Fairness bills currently on the docket did include relief for the small online sellers. There is strong across-the-board support for the Marketplace Fairness Act, which would be the most lenient on smaller online sellers and also allow the states have their choice of either joining the SSTP or creating a similar process of their own.
