Among her proposals to address the state’s enormous budget hole in last month’s State of the State address, Governor Mary Fallin called for “sales tax modernization.” Modernization could have several components, including broadening the sales tax to cover more services (which we discussed here), eliminating sales tax exemptions, applying the sales tax to items delivered electronically, and improving sales tax auditing. All these could be valuable reforms, though their political likelihood varies greatly. One reform that may have the best chance for legislative action on the sales tax this session is a renewed effort to collect sales tax on online sales.
Oklahomans already legally owe state and local taxes for their online purchases, regardless of whether the seller charges the tax. However, the US Supreme Court ruled in the 1992 Quill decision that retailers lacking a physical presence in a state, or “nexus,” cannot be required to collect and remit taxes. This means that an online retailer like Target.com, that has brick-and-mortar stores in Oklahoma, collects sales tax on online purchases from Oklahomans, while other online retailers, like Amazon.com, do not. Oklahoma encourages taxpayers to pay the tax they owe on their online purchases when they file their annual taxes, but less than 4 percent of filers actually do so.
With the unrelenting growth of online commerce over the last 20 years, the revenue consequences of the barriers to collecting tax on remote sales are substantial. The National Conference of State Legislatures estimated that Oklahoma lost $140 million in unpaid use tax revenues from e-commerce in 2012 and $296 million when all remote sales are considered. A recent study from Civic Economics and the American Bookseller Association determined that Oklahoma is losing $45 million annually in sales tax just from Amazon.com. As well as being a tax and budget concern, the ability to sell goods tax-free creates a significant competitive advantage for online retailers over the brick-and-mortar stores in our cities and towns.
Nearly everyone agrees that the best approach to leveling the playing field is for Congress to take action to allow states to require the collection of taxes from online retailers. Legislation such as the Marketplace Fairness Act has support from a broad coalition of national and local trade associations, state and local government organizations, and businesses. To address concerns from retailers about complying with multiple state and local laws, the Act requires states to adopt the Streamlined Sales and Use Tax Agreement, to which 24 states, including Oklahoma, already adhere, or to implement comparable simplifications. The Marketplace Fairness Act passed the U.S. Senate in 2013 by a vote of 69-27 but has remained stalled ever since.
“It appears that the growing strain on local business from competing with untaxed Internet retailers, combined with the state’s budget emergency, might prompt Oklahoma to action.”
In the absence of Congressional action, states have tried various approaches to expand tax collections on online sales. Oklahoma took a modest first step in 2010 when it passed legislation requiring remote sellers to disclose to their customers that they may owe tax on what they are buying even though the seller is not charging the tax. A growing number of states have gone further, however. Beginning with New York in 2008, twenty states have adopted so-called “Amazon laws.” Under these laws, arrangements that provide compensation to state residents for linking to an online retailer, such as Amazon’s affiliate programs, are deemed to establish nexus and require tax to be collected. So far, Amazon Laws have withstood legal challenge.
Colorado adopted a different approach by passing legislation in 2010 that required companies that did not collect sales tax on online purchases by Colorado resident to advise customers of taxable items and give them an annual notice of total purchases on which taxes may be owed. Retailers must share customer information and purchases with the state revenue department. Last month, the U.S. 10th District Court of Appeal upheld Colorado’s law against a challenge filed by the Direct Marketers Association.
Legislation introduced in Oklahoma this session would help the state collect taxes from more online retailers. HB 2531, authored by Rep. Chris Caldwell and labelled the “Oklahoma Retail Protection Act”, broadens the definition of “maintaining a place of business in the state” to include businesses that maintain various relationships with individuals or businesses located in Oklahoma, such as through maintenance service agreements, delivery services, and storage, among other things. It also expands collection requirements to “marketplace providers,” which are persons and entities that facilitate sales by a retail vendor. HB 2531 passed the House narrowly and now awaits action by a Senate committee.
It appears that the growing strain on local business from competing with untaxed Internet retailers, combined with the state’s budget emergency, might prompt Oklahoma to action. Passage of the Oklahoma Retail Protection Act won’t single-handedly level the economic playing field or fix the budget, but it’s an important and worthwhile step in the right direction.