Legislation To Require Sales Tax Collection on Interstate Sales

Legislation is expected to be introduced in the Senate that would require any seller to collect and file sales tax returns on all interstate sales.  Long-supported by a number of states, this anticipated legislation would bring some uniformity to state sales tax requirements but would require even small businesses to collect sales tax and file returns for any sales made into another state.  Under current law established in a 1992 Supreme Court decision, a seller is only required to collect sales tax and file returns if that seller has a physical nexus to the state into which the sale is made. 

Many states are very concerned with the lost tax revenue resulting from the failure of purchasers to voluntarily file and pay use tax on out-of-state purchases.  And, given this compliance gap, many states have joined together in an attempt to require collection of sales taxes by out-of-state sellers in an effort known as the “Streamlined Sales Tax Project.”  The states participating in this effort believe if they can devise a common simplified system for collection and remittance of sales taxes, it would not be overly burdensome to require businesses to collect and remit sales taxes, wherever the sale is made.

Most “big box stores” also favor this legislation.  Why?  Most “big box” stores already have a presence in most states, and therefore are already required to collect sales taxes in the states in which they operate.  Accordingly, the big box stores see this sales tax issue as a competitive disadvantage. They have to file and pay over sales taxes, while competing against virtual sellers, such as Amazon, which are not required to collect sales taxes in most states. 

So while the big battle is shaping up between the states and national chain stores on one hand, versus national virtual vendors on the other, small businesses also have a huge stake in this controversy. If the Streamlined Sales Tax Project legislation is enacted, small businesses also would be required to collect and remit sales taxes for out-of-state sales.  That is, a mom-and-pop store selling products via the Internet to 50 states would be required to collect and remit sales taxes to each of those states that have a general sale tax.  (Currently, 46 states and DC have a general sales tax.)  Clearly, the added compliance cost would be prohibitive, so it’s just a non-starter for small businesses.  This leaves two options:  oppose any streamlined sales tax legislation or advocate for an exemption for small businesses.

Whatever approach or combination of approaches is negotiated, the bottom line is that the requirements of the streamlined sales tax legislation must not be applied to small businesses.