Federal Watchdog Calls for National Online Sales Tax Standards

The federal government’s main watchdog agency is urging Congress to create nationwide standards for taxing the sale of goods, saying a U.S. Supreme Court ruling has led to a “complex patchwork” of state and local regulations that are burdensome and unfair to some businesses.

There’s at least some support for the idea in Congress.

Senate Finance chairman Ron Wyden, who has proposed national standards along these lines, argues that trying to follow regulations that vary from state to state, and even city to city, is difficult, particularly for small businesses selling products online around the country. Notably, Wyden’s home state of Oregon doesn't impose a general sales for online or brick-and-mortar transactions.

“It’s hard enough to run a small business without dealing with hundreds of different state and local sales tax regimes,” Wyden, a Democrat, whose committee is responsible for tax policy, said in a statement to Route Fifty.

Bills proposed by Wyden and others that would create consistency between states on questions like which small businesses are exempt from collecting sales taxes for online sales, haven't been able to find the votes to pass in Congress. 

The National Conference of State Legislatures has opposed proposals like this in the past fearing they could block states from setting their own tax policies.

Lawmakers on Capitol Hill are also divided over questions like whether to tax online sales at all. And with Republicans claiming the House in this year’s elections and Democrats still in control of the Senate, Congress is likely heading into a period of legislative stalemates for at least the next two years. 

“Whether this gets traction is uncertain, but I wouldn’t bet on it with gridlock next year,” Garrett Watson, a senior policy analyst with the Tax Foundation, said in an email, referring to proposals for a national online sales tax policy.

The issues in play involve an array of tax rules passed around the country since a 2018 U.S. Supreme Court decision in the case South Dakota v. Wayfair. 

In a landmark ruling for state and local governments, the high court ruled that states could begin taxing online purchases by their residents, even if businesses making the sales do not have a physical location, like a store or warehouse, within their boundaries. 

Previously—under a court precedent that dated to the mail-order catalog era—states were restricted to only taxing online sales by businesses with an in-state physical presence.

In the years since Wayfair, states that had said the old restriction cost them revenue “responded quickly with new remote sales tax requirements, resulting in a complex patchwork of requirements with wide variation,” the U.S. Government Accountability Office said in a report issued this month.

By June 2021, all 45 states with statewide sales taxes, along with the District of Columbia, had adopted laws on collecting sales taxes for online sales by businesses based outside of their borders, according to the report. 

The problem, the GAO report said, is that the wide variety of laws has made it difficult for businesses because selling products to a customer in one state involves complying with different laws than when they sell the same product to someone in a different state.

For instance, states have different thresholds defining what small businesses are exempt from collecting the tax. 

As of September, the GAO report said, 22 states and D.C. exempted businesses unless they had $100,000 in sales or 200 online transactions with in-state consumers.

California, New York and Texas, on the other hand, set a higher threshold, exempting businesses unless they made $500,000 in sales. Other states, like Florida, Kansas and Missouri, also do not consider the number of sales, only the dollar amount. 

Rules also vary with when businesses are required to register with states. 

Some, like Maine, Mississippi, South Dakota and Wisconsin require registration as soon as a business hits the threshold that makes it subject to the taxes. Others have different rules, like Hawaii and Maryland, which require registration the month after the threshold is met.

In addition, 10,000 to 12,000 localities in the country impose sales taxes, many with different rules and rates.

Alabama alone has more than 300 local tax authorities, the report noted.

Some states have tried to simplify regulations around the country, the GAO report noted. One notable effort on this front is the Streamlined Sales Tax Project, which has looked for ways to reduce administrative and compliance costs and difficulties companies face with sales taxes. 

Specific states, like Alaska and Colorado, have also made attempts to create centralized systems for collecting local online sales taxes. But they’ve seen mixed results in terms of adoption. For example, as of September, only 80% of localities that administer their own sales taxes in Colorado were taking part in the initiative there, according to the GAO report.

“Forty-five states and hundreds of localities have different laws for sales taxes. Different tax rates. Different regulations for who collects taxes. Different rules and definitions for taxable products. In Illinois, you’ll pay sales tax on a Snickers bar, but not on a Twix.” Wyden noted at a Finance Committee hearing on the issue in June.

“Small businesses are on the hook for managing that complex web of laws. They’re essentially forced into buying costly software and hiring consultants,” he said, adding: “As long as the Wayfair ruling stands, the Congress ought to step in and give small businesses some relief.”

Wyden also said in his statement to Route Fifty that, under Wayfair, Congress should exempt small businesses that have revenues under a certain threshold and set standardized rules that “lay out what states can require of small businesses outside their borders.”

Wyden in 2019 reintroduced a bill, the Online Sales Simplicity and Small Business Relief Act, which would have exempted small businesses that see less than $10 million a year in total sales. The bill also would have prevented states from beginning to impose the tax before 2021. The legislation was originally proposed in 2018 by Democratic Sen. Jeanne Shaheen, of New Hampshire—another state that doesn’t have a general sales tax on goods.