In tax-free states, businesses squirm at collecting online sales taxes for others
The “Live Free or Die” state of New Hampshire is also the “Live Sales-Tax Free” state, one of only five that do not collect any tax on retail purchases. And despite a U.S. Supreme Court ruling in June allowing states to collect sales taxes when their residents buy online, some of New Hampshire’s online retailers don’t want to help other states collect their money.
New Hampshire lawmakers tried a couple of months ago to write a law that would have set up a series of hurdles for other states that want New Hampshire retailers to collect sales tax on their residents’ purchases. The bill called for outside tax authorities to first register with the New Hampshire attorney general, pay a fee and then prove the constitutionality of the sales tax. The legislation failed – partly because of fears it would expose the state’s small businesses to litigation from other states – but the resistance remains.
“It’s extremely unfortunate that retailers who do not have to collect taxes for the state of New Hampshire are going to be put in the position of having to collect for other states,” said Nancy Kyle, president and CEO of the New Hampshire Retail Association, representing 900 businesses in the state. “This is a very difficult thing for small retailers to implement.”
“I would advise my members to talk to the (state) Department of Justice and consult with their own attorneys,” she said.
Five states: The New Hampshire case illustrates the complexities of collecting online sales taxes, especially for retailers in New Hampshire and the other four states (Alaska, Delaware, Montana and Oregon) that don’t impose their own sales tax. The Tax Foundation, a nonprofit conservative study group, estimates there are about 10,000 sales tax jurisdictions in the country, including not only state governments but also city, county, tribal and special district governments. That poses special difficulties for retailers in non-sales-tax states.
“Delaware does not impose a sales tax, and we will not be enforcing any form of sales tax or use tax against out-of-state sellers,” said Leslie Poland, community relations coordinator for the Department of Finance.
However, Delaware Director of Revenue Jennifer Hudson said in a statement that vendors in Delaware “may be required by other states to collect sales taxes due in those jurisdictions on remote sales made to residents of those jurisdictions.” She did not say how that would be enforced.
The Montana Department of Revenue issued a statement advising online retailers that sell to buyers outside the state to “please seek competent legal advice on how to proceed with collecting and remitting sales tax.” The department did not provide any guidance.
Christopher Galdieri, a professor at St. Anselm College in Manchester, New Hampshire, who pays close attention to state policy, predicted that many New Hampshire retailers won’t collect any sales tax until they get clearer direction.
“A lot of these businesses are figuring, ‘When somebody tells me when to start collecting, and how, I’ll do it, but until then I won’t worry about it,’” Galdieri said.
Legislation: The New Hampshire Legislature likely will revisit the failed sales tax bill, Galdieri said, because being anti-tax is “part of the state’s identity” and people don’t want to be identified with collecting taxes, even for other states. State lawmakers from both sides of the aisle buttressed that view.
“This is like, ‘I’ll tattle on your citizens if you tattle on mine,’” said state Rep. Bill Ohm, a Republican who supported the bill. Democratic state Rep. Bill Hatch, another supporter, said it isn’t reasonable to expect businesses based in his state, which aren’t used to collecting sales taxes, to do so for the thousands of out-of-state jurisdictions where their customers might live.
“If I delivered something to the state of Maine I would have to collect Maine sales tax,” he said at a recent meeting of the National Conference of State Legislatures. “Most businesses aren’t structured to collect sales tax. How do I know the sales tax in 10,000 jurisdictions?”
Colorado is a prime example of a state with multiple sales tax jurisdictions that could pose calculation problems for online retailers beyond its borders.
Sizable complications: Colorado’s Revenue Department announced last week that it will start requiring out-of-state online sellers with at least 200 transactions in Colorado, or $100,000 worth of sales annually, to collect and remit Colorado sales taxes. But Joseph Bishop-Henchman, executive vice president at the Tax Foundation, wrote that Colorado has a “big problem” because it relies on its 349 county, city and district local sales tax jurisdictions to oversee the collection of sales taxes. That fact makes it difficult for out-of-state online retailers to calculate and send in the correct tax to the correct jurisdiction.
Other states that levy a sales tax are encountering their own complications. For example, South Dakota, the state that started it all by bringing the South Dakota v. Wayfair Inc. case to the U.S. Supreme Court, had to delay online sales tax collection until it called a special session of the Legislature to pass a new law explicitly allowing it. Republican Gov. Dennis Daugaard signed the measure earlier this month.
But in five states – Hawaii, Maine, Mississippi, Oklahoma and Vermont – collections have already begun, according to the Sales Tax Institute, a training and education firm for businesses. A dozen more will start Oct. 1, followed by others in November and January.
“There are now 30 states (out of 45 states and D.C. with a sales tax) that have announced enforcement or have legislation” in the works, said Diane Yetter, founder of the Sales Tax Institute. She said California and South Carolina also plan to proceed, but have not yet approved legislation.
“States have moved quickly,” she said. “A few believe they need to pass enabling legislation, but most recently more are moving forward through regulations rather than legislation. It really depends on how the state’s current definition of retailer doing business is written.”
Incentive: There is a powerful incentive to move quickly. Overall, states with sales taxes could collect $26 billion annually from online purchases, according to the National Governors Association. The Government Accountability Office put the number lower – between $8 billion and $13 billion a year – for online and mail order transactions.
Either amount would be welcome. Maine, for example, estimates it could collect $20 million a year from online sales that aren’t now taxed out of a two-year budget of about $6.8 billion.
Before the Supreme Court’s ruling, brick-and-mortar stores argued strenuously that they were being disadvantaged by a tax system that required them to collect and remit sales taxes – and not their online competitors. Online sellers argued equally strenuously that collecting the sales taxes on out-of-state purchases would be burdensome.
Most analysts say that online buying is more about convenience than price, and that a small additional tax won’t make a dent in the burgeoning online market. Amazon, for example, has been collecting on all direct sales since last year (now it must collect from third-party sellers as well). Amazon’s revenue grew 30 percent in the fourth quarter of 2017.
“People have been paying sales-use tax on many of their online sales for years and that volume has unquestionably grown in the past two years,” Verenda Smith, deputy director of the Federation of Tax Administrators, said in an email. “The buyers who notice a change will be those who specifically sought out ‘no sales tax’ sellers. They will find far fewer of those in the marketplace now.
“Many people will never even notice a difference.”