After the US Supreme Court last year ruled that online sales could be taxed, states raced to take advantage of the decision.
Now, the Massachusetts Legislature has joined the gold rush.
Lawmakers on Beacon Hill tucked language into the back of their new state budget this week that seeks to capitalize on the 2018 court ruling, in the South Dakota vs. Wayfair case.
For budget writers, the new legislation means as much as $42 million in additional taxes collected over the new fiscal year, which began on July 1.
For brick-and-mortar retailers, the gain might be worth even more over the long haul.
The Retailers Association of Massachusetts has long complained about the threat that New Hampshire poses, by offering sales-tax-free shopping just over the border. The group’s gripes shifted to e-commerce as more people shopped on their laptops and smartphones.
Bill Rennie, a vice president at the trade group, says this budget language finally levels the playing field with out-of-state sellers. Until recently, Rennie says, most of those companies took advantage of a 1992 Supreme Court decision known as Quill that restricted sales tax collections to retailers with a physical presence in a particular state. The Wayfair decision upended this understanding and opened the door to online sales taxes — within reasonable limits. It was time, the nation’s highest court decided, to reflect the dramatic shift in consumers’ shopping patterns.
Boiling it down, the new budget language makes two important changes to state tax law. Out-of-state retailers with at least $100,000 in annual sales in Massachusetts need to collect and remit the state’s 6.25 percent sales tax on items sold here. The legislation also makes it clear that online marketplaces — Amazon, Etsy, eBay, and the like — are now responsible for collecting taxes on sales made on their platforms by third-party vendors.
The Tax Foundation, a nonprofit D.C.-based group, says that as of June 5, more than 30 states had passed legislation to take advantage of the Wayfair ruling, with another eight putting out guidelines about how to start collecting online sales taxes.
The Massachusetts Department of Revenue had a head start. Amazon, the country’s biggest online seller, started collecting sales taxes here in late 2013, because it had physical operations in the state. By the time the judges issued their Wayfair decision last June, Amazon was collecting in all states with sales taxes.
In the fall of 2017, the Baker administration’s revenue department went one big step further. That’s when the agency put in place what became known as a “cookie tax” on online sales. The agency argued that online sellers’ software and tracking codes counted as the necessary nexus for taxation, because they appeared on residents’ phones and computers. Electronics retailer Crutchfied quickly sued in an effort to stop the tax; the Massachusetts tax collectors went ahead, anyway. (That case is still pending in Virginia.)
The cookie tax had its limits: Only companies that made at least $500,000 in annual sales in Massachusetts and at least 100 transactions a year here would be affected. The new legislation significantly reduces that threshold, to keep it in line with parameters suggested in the Wayfair decision, and expands the pool of vendors to include smaller independent sellers that use Amazon and the other big online platforms.
Jared Walczak, a senior policy analyst at the Tax Foundation, says having those parameters in state law could help defuse any future legal challenges. Massachusetts is still potentially more exposed, he says, than the 20-plus states that belong to a streamlined sales tax coalition. But we’re better off than states such as Colorado and Louisiana that have multiple local sales tax jurisdictions. The Wayfair ruling essentially says online sales taxes can’t put an undue burden on interstate commerce. Simplicity matters.
Spokespeople for Amazon, eBay, and Etsy say they’re trying to ensure entrepreneurs and small businesses face as small a burden as possible as far as sales tax rules are concerned. The Etsy spokeswoman says the ever-growing patchwork of requirements can make it challenging, which is why the company supports a simple, federal solution.
Even with the Wayfair decision, such a federal solution to sales tax collections still seems like a far-off dream. You can’t blame state lawmakers for not waiting for Congress, when tens of millions of tax dollars are there for the taking.