The burgeoning growth of mobile payments could become the tipping point for proposed national legislation that would force merchants to charge state sales taxes for the first time on many goods and services sold through online channels, a national tax expert tells PaymentsSource.
Discussions have swirled for years around establishing a national sales tax law for online purchases, but as more commerce shifts to mobile devices and states grow hungrier for revenue, pressure for states to capture a greater share of sales tax for items sold online is likely to increase, contends Anthony Castellanos, a partner in the New York office of KPMG LLP, a U.S. audit, tax and advisory services firm.
“Mobile commerce as a category is only going to increase, and as a greater share of those transactions move to mobile devices and other nontraditional channels, it begins to blur the line between brick-and-mortar and online to the point where states are going to insist they get their fair share of sales tax for all transactions,” Castellanos says.
A bipartisan bill introduced Nov. 9 in the U.S. Senate would authorize states for the first time to require all online retailers to collect sales tax from in-state customers, including in states where they have no physical presence. Retailers with less than $500,000 in annual sales from customers in states where the retailer has no physical presence would be exempted.
A 1992 Supreme Court ruling prohibits states from collecting sales tax from online merchants unless they have a physical presence in the state.
Lawmakers believe the bill could capture some $23 billion in tax revenues for state and local governments from online sales. U.S. online retail sales totaled $36.3 billion in the third quarter ended Sept. 30, up 13.1% from $32.1 billion a year ago, according to ComScore Inc.
Amazon.com Inc., which faces a new online sales tax collection law going into effect next year in California, has voiced its support for the Marketplace Fairness Act, which is being backed by 10 senators including Sen. Dick Durbin, D-Ill., Sen. Mike Enzi, R-Wyo. and Sen. Lamar Alexander, R-Tenn. Amazon favors the bill because it sets a “constitutional” framework for collecting sales tax online.
However, EBay Inc. and scores of other online retailers oppose the proposed bill. They contend it will stifle small-business growth.
The mechanics of how states would collect sales tax from merchants under the proposed law could be complex, Castellanos predicted, adding that hammering out the details of legislation could be a lengthy affair.
“There will be debate on how you allocate sales tax dictated on a national level down to the individual states, specifically what process will need to be put in place to ensure that the tax gets back to the state that it’s due,” Castellanos says.
Complying with the proposed law could be burdensome for online and mobile merchants, he says.
“Setting up a new process to calculate and charge sales tax, which varies in each state, can be pretty onerous,” Castellanos says. Brick-and-mortar retailers have developed sales-tax systems over decades, but maintaining across national store networks can still be “an enormous undertaking.”
If national legislation to collect state sales tax on online and mobile purchases goes into effect, “there will probably be a new industry cropping up–a centralized processor to handle tax collection and remittance–and its requirements will include capturing sales through a growing number of payment channels,” Castellanos says.
Wireless carriers, which have highly developed systems for calculating and collecting diverse types of taxes and fees from consumers across all states, possibly could seek a role in helping online and mobile commerce players with the burden of collecting state taxes, Castellanos speculates.
“The wireless business has reached a saturation point in signing up new customers and could be ripe to get a piece” of the online sales tax-collection business, he says, declining to specify how that might work.
Despite the complexity of creating a system to capture state sales tax on online and mobile commerce purchases, Castellanos says he believes odds are high that some form of national legislation to promote it eventually could pass.
“There are so many other things on the federal government’s agenda that passing a national online sales tax law is going to be a real challenge,” he says. “But the pressure is coming from the states, which need the funds, and momentum is building, especially with the growth of mobile commerce.”
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