We’ve all seen the ads and sales claims telling you to buy online because it’s tax free. In most cases, this is too good to be true.
For the most part, when a seller is not physically present in a state, they are not required to charge sales tax to customers in those states. This does not mean that sales taxes are not due, but rather it means that it is not the seller’s responsibility to collect and remit it. The onus falls on the buyer to “self-report” the taxes on any items they purchase that are delivered to their home state where sales taxes were not charged. This tax is normally referred to as use tax. Almost every business is aware of this tax and is fairly proactive in tracking and paying these taxes to the state. With tightening budgets, many states have focused not only more time on businesses not properly reporting these use taxes, but also individuals.
In an attempt to collect more use tax on individuals’ untaxed purchases, over half of the states have added a line item on the individual returns for use tax. Some states include a table taxpayers can use to quickly estimate non-taxed purchases based on income levels. Unfortunately, from a revenue collection standpoint, less than 1% of taxpayers reportedly fill out this line.
Currently the estimate of lost sales tax across all states from non-taxed internet and mail transactions is over $13 billion annually. With an increasing number of state budget shortfalls, many states are attempting to enact legislation to try to capture this lost revenue. As of January 2017, there were 35 bills pending in 17 states moving away from the traditional brick and mortar physical presence test toward an “economic nexus” approach using sales dollars or numbers of transactions (or both) to determine state nexus and the requirement to collect sales tax.
Some states prefer to have sellers provide more information so taxes can be properly collected under the current tax laws. Wisconsin currently uses this overall initiative. Wisconsin SB 259, introduced May 17, 2017, requires sellers without nexus to Wisconsin to provide an annual itemized statement to each Wisconsin customer listing their purchases from the previous year. This rule applies to any shipper with over $50,000 yearly sales in the state.
Although sales and use taxes are technically a state issue, the federal government recognizes that states have limited ability to fix this situation. In 2013, Congress passed the Marketplace Fairness Act. This act gives states the ability to force online sellers to collect and remit sales tax for all transactions, regardless of nexus status. To help implementation, it simultaneously forces states to simplify their state and local taxation rates so the process is not too burdensome for the sellers. Despite passing Congress with strong bipartisan support, the bill is still in the House of Representatives and has not reached the floor for a vote.
Regardless of what happens to sales and use taxation, it is clear it will continue to change as states try to fill the budget shortfalls. The question is how will it change and when. Are you ready? RBP is prepared, and we are here for you.
Article by Brad Voght, C.P.A.