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Tax Planning
Streamlined sales tax: Why the big deal
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Net revenues by local jurisdictions 2013The topic of an online sales tax is as old as e-commerce itself and has been debated in Congress for years. Currently, there’s no federal law requiring online and mail-order retailers (collectively called remote sellers) to collect taxes from customers in those states where the companies have no physical presence. Shoppers have become savvy too: Many drop by their local retailers to window shop, then order online to take advantage of the tax-free buying.

Many states, including Washington, have a so-called use tax — imposed on tax-free purchases that would normally have a sales tax — but compliance is usually voluntary. In states that have personal income tax, it’s supposed to be reported on the income returns. In Washington, businesses are supposed to report and pay use tax with their business-and-occupation tax filing — and the state is not shy about sending notices to businesses it suspects of having unreported use tax.

The problem is that states are losing a lot of money because of people buying from online and catalog retailers. Some studies estimated the loss at as much as $23 billion in 2012.

To try to remedy the problem, at least in part, 44 states along with the District of Columbia, local governments and businesses worked to create a Streamlined Sales and Use Agreement. The purpose of the agreement is to minimize administration costs on retailers collecting the tax. The agreement encourages online and mail-order retailers not obligated to collect the tax to do so voluntarily in the states that are part of the agreement.

To participate, in turn, states have to use streamlined sales tax, also called destination-based. That means they have to require sales tax rates to be collected based on the point of destination instead of origination. Currently, 24 states have adopted the streamlined system.

Washington state adopted destination-based tax in July 2008 (services and some types of sales are exempt). While many retailers were not impacted by it unless they sell online or ship products out of state, any business that offers in-state deliveries or on-site services had to change its systems to comply.

When the Legislature approved the new law in 2007, it also created a compensation system for jurisdictions that stood to lose revenues from the change. The compensation is temporary until new revenues generated from the streamlined tax offsets the losses, and is based on actual losses.

Locally, the jurisdictions that were expected to lose the most were the city of Poulsbo ($95,000 the first year) and the city of Gig Harbor ($200,000), a study conducted prior to the new legislation estimated. Instead, Kitsap Peninsula Business Journal calculations based on data from the Department of Revenue show that Gig Harbor netted a benefit of $357,911 in the first year (starting with the third quarter of 2008), and Poulsbo, $39,143.

Only Bremerton, Port Orchard and the county received mitigation payments from the state: a total of $20,085, $36,289 and $122,316, respectively (but all have netted positive to date).

Back in 2008, about 1,100 online and mail-order businesses voluntarily participated in the agreement. Now, that number is at 1,400. According to the Streamlined Sales Tax Governing Board, together those retailers have collected more than $700 million in sales taxes.

Congress, in the meantime, hasn’t stopped working on the issue of remote-sales tax at the federal level. Some lawmakers have lobbied for it for years but bills have routinely died.

The issue goes all the way back to 1992, after a Supreme Court ruling in Quill Corp. vs. North Dakota. The state had tried to impose use tax on the company, a mail-order office supplies retailer based in Illinois. The Supreme Court ruled that collecting the tax was not inherently unconstitutional, but left existing rules in place while encouraging Congress to consider the issue.

And Congress did. The latest effort is the Marketplace Fairness Act, which the Senate passed in May by a vote of 69-27. A similar bill was introduced in the House in February and has been sitting in a Judiciary subcommittee since April, according to congress.gov. The law would only require “remote sellers” to collect the tax if they have annual gross receipts over $1 million and only in the states that follow the streamlined tax agreement.

The National League of Cities called on the House in September to move the bill along, but opposition — led by eBay — has been strong as well, including by states that don’t have sales tax (currently, no sales tax is collected in Oregon, Alaska, Montana, Delaware and New Hampshire.)

In June, Rep. Bob Goodlatte, R-Va., the chair of the Judiciary Committee, said it was doubtful the bill would pass and that House Republicans were creating their own version. It may be a while before it gets traction, however — the lawmakers are expected to focus on healthcare-related and budgeting bills when they return from their recess.

The online legislative tracking tool GovTrack.us from Civil Impulse, LLC gives the current version of the bill a 67 percent chance of passing committee and 28 percent of being enacted.

 
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