On Saturday, the list of states where Amazon collects and remits sales tax on purchases grew to 46, including the District of Columbia. Even though technically that means they added only the states of Hawaii, Idaho, Maine and New Mexico to the roster, this is a watershed moment for sales and use tax reform. Amazon now collects sales tax in ALL states that require it (only the “NOMAD” states of New Hampshire, Oregon, Montana, Alaska, and Delaware have no state-wide sales tax requirement). This is a significant symbolic change that will tilt the scales towards sales tax reform.
Amazon’s gradual policy change
Ever since the Quill decision of 1992, states have had a difficult time compelling out-of-state and online sellers to register for sales tax in their states. In fact, Amazon would battle states and refuse to register for sales tax under the cover of the Supreme Court’s ruling in Quill, which said that states can not require sellers to remit sales taxes if they do not have a physical presence (“substantial nexus”) in the state. Amazon could only do this, however, in states where they did not own a warehouse or an office.
Starting in about 2012, Amazon began changing their philosophy around sales tax. Recognizing that consumer behavior was shifting around delivery expectations, Amazon began building warehouses around the country to enable faster delivery. To do this though, they were forced to negotiate with the states where they wanted to build warehouses, including an agreement to start collecting and remitting sales taxes. Since 2012, consumer expectations have continued to shift, and Amazon has moved in lockstep to meet demand with increasingly fast and convenient delivery options. Accordingly, and especially over the last year, Amazon rapidly relented to the remaining states where they weren’t collecting sales tax.
States target Amazon’s competitors
Now that Amazon is collecting sales tax in all states that require it, the pressure is on Amazon’s competitors as states look to compel out-of-state sellers to register and remit sales taxes. Because the states are hamstrung by Quill, and Congress has yet to push a federal sales tax bill over the finish line, states are increasingly inventing creative ways to circumvent Quill. Forcing sellers to register and remit is far more effective than collecting use tax individually from in-state residents.
Colorado found an interesting way to work around Quill by requiring out-of-state sellers to report their transactions to the Department of Revenue if they don’t register for sales tax. In other words, if out-of-state sellers choose not to voluntarily register to collect sales tax in Colorado, they are forced to rat out their customers so the state can collect use taxes from them. This scheme, originally enacted in 2010, was upheld as constitutional recently following multiple years of constitutional challenges by Direct Marketing Association, resulting in multiple states looking to replicate Colorado’s model. Colorado will start enforcing this law on July 1st.
If Congress does not act, the Supreme Court will
Many other states are in the process of pushing the limits of Quill with the explicit goal of reaching the US Supreme Court (SCOTUS). South Dakota, for example, enacted an “economic nexus” law that was designed to make it all the way to SCOTUS. An immediate challenge is currently on its way to the South Dakota Supreme Court. Indeed, if Congress fails to act, one if not multiple state laws will make its way to SCOTUS and sales tax reform could come from an opinion overturning Quill from the highest court in the nation.
Although Congress has many priorities that have been laid out in this important year for the new administration, sales tax may end up on the docket this year or next given the momentum from Amazon’s change coupled with the increased challenges states and courts are facing. The only question is whether sales tax reform will come prior to a ruling by SCOTUS or following.
Several proposals have been floated over the last five years or so in Congress. The most successful attempt was the Marketplace Fairness Act (MFA) of 2013. MFA would perpetuate the current incredibly complicated destination-based sales tax scheme while giving states the teeth they need to enforce their local laws. Rep. Bob Goodlatte (R-VA), on the other hand, would like to move to an “origin-sourcing” scheme in an attempt to simplify the sales tax laws. Neither proposal is perfect, so hopefully Congress can compromise and create a bill that’s fair to both large and small sellers.
The route to reform is not perfectly clear yet, but one way or the other we’ll have a significantly different sales tax landscape over the next 1-2 years.
What this means for wineries
Wineries that ship products directly to consumers can currently ship to 45 states with the proper permits. Most of those states require the wineries to first register with the Departments of Revenue for sales tax remittance prior to obtaining their direct shipping permit. Yet some of those states still do not require sales tax registration. Minnesota, for example, currently does not require sales tax registration. The current flurry of activity and momentum towards sales tax reform will surely mean that wineries should prepare for the eventuality of having to register and remit sales taxes in all non-NOMAD states that allow direct shipments.