An E-Fairness FAQ

January 22, 2008

What is "e-fairness"?

Sales tax laws in the 45 states that collect sales tax stipulate that when a company has a physical presence in the state (called "nexus") -- through a retail store, warehouse, office, or sales agent -- the company must collect and remit sales tax on purchases made by customers in those states. However, some online retailers with affiliates (who act as both an office and sales agent) in these states are not collecting sales tax, while their in-state competitors are. This creates an uneven playing field because many in-state customers will take advantage of tax-free, online shopping. As a result, in-state retailers lose business and the states lose much-needed tax revenue. Enforcing the sales tax law by requiring out-of-state online retailers with nexus to collect sales tax would bring about "e-fairness."

How can these online retailers get away with not collecting tax on purchases made in states where they have affiliations?

The relative newness of the Internet as a shopping medium and the rise of affiliate marketing has in some ways clouded the issue. Many online retailers will point to a 1992 Supreme Court judgment, Quill Corp. v. North Dakota, to justify why they are not collecting sales tax in states where they have affiliates. The Quill decision does underscore the need for "nexus" -- that without nexus it would be too burdensome for a company to collect sales tax in every state due to the complexity of various state and local sales tax systems. However, Quill -- which was written before the advent of online affiliates -- does not change the meaning of nexus. A company has nexus in a state through a retail store, warehouse, office, or sales agent. Though the definition of nexus varies slightly from state to state, on balance, ABA believes an affiliate in a state constitutes nexus since the affiliate clearly acts as an office and/or sales agent for the company.

What is the Streamlined Sales Tax Project?

The Streamlined Sales Tax Project (SSTP) is an effort created by state governments, with input from local governments and the private sector, to simplify and modernize sales and use tax collection and administration, making it much easier for online retailers to collect sales tax. Retailer participation in SSTP is voluntary, but as of this past summer, some 1,000 businesses in the 21 participating states have agreed to collect sales tax on remote sales. A brief summary of the project can be downloaded at http://www.streamlinedsalestax.org/execsum0105.pdf.

So what is the "Streamlined Sales and Use Tax Agreement"?

The Streamlined Sales and Use Tax Agreement (SSUTA) is the official agreement made by states that are participating in SSTP. ABA supports SSUTA.

If participation in SSUTA is voluntary, why would companies that don't want to collect and remit sales tax do so?

It's true that many companies will not voluntarily participate in SSUTA and will continue doing business as usual. Toward that end, the Sales Tax Fairness and Simplification Act is federal legislation that would permit states that become voluntary members of SSTP to require remote sellers to collect and remit sales and use taxes under SSUTA. Sen. Michael Enzi (R-WY) introduced this bill into the Senate in late May 2007. Rep. William J. Delahunt (D-MA) introduced similar legislation into the U.S. House of Representatives in August 2007. The legislation has not yet been passed.

Does ABA believe the federal government needs to pass the Sales Tax Fairness and Simplification Act in order to collect sales tax?

No. It is the association's strong belief that online sellers with affiliates in states already have an obligation to collect sales tax under existing sales tax law. The key is both to educate legislators on this issue and for in-state business owners to make known their belief that existing tax laws should be enforced.

Isn't this call for online sales tax very unpopular with consumers?

It's hard to imagine taxes ever being popular, but it is important to remember that this is not a new tax. And the reality is that when states allow out-of-state businesses to pirate away dollars that normally would have been spent in-state, they are doing nothing less than helping to encumber their state's own economy. In the end, the state's citizens end up the big losers. Uncollected sales tax revenue translates into a funding shortfall for such essential services as schools and first responders. It is conceivable that some states and local jurisdictions will try to make up for that lost revenue by increasing property or school taxes, or both. The bottom line is that states will need to get the money from somewhere. Given the choice between another drastic property tax increase, or having online retailers follow the law and collect sales tax, most consumers would choose the latter.

What can booksellers do to help?

Write your governor and ask that he or she equitably enforce existing tax laws by requiring out-of-state retailers with nexus in our state to collect sales tax. To make things easier, ABA has created a template that booksellers can adapt and send. It can be found here .In addition, booksellers should urge their members of Congress to support the bills introduced by Sen. Enzi and Rep. Delahunt.

For more information, visit www.bookweb.org/advocacy/salestax or contact ABA Public Policy Liaison David Grogan at (914) 373-6662 or via e-mail at dave@bookweb.org.

Topics: Sales Tax Initiative,