GOV. CHARLIE BAKER IS LAUNCHING an initiative to indirectly start collecting sales tax from Massachusetts residents making purchases over the internet.
The move by Baker is somewhat risky, both politically and legally. Court decisions have barred states from requiring companies outside their borders to collect and remit sales taxes incurred by their residents, but in the absence of federal legislation a number of states are exploring work-arounds. Colorado has adopted one approach that has been blessed by the US Supreme Court; South Dakota is pursuing another angle. Baker’s approach is similar to South Dakota’s model.
Politically, Baker’s strategy is risky because he is trying to tax internet sales, which runs counter to his no-new-taxes image. But aides say the governor isn’t imposing a new, broad-based tax, merely collecting a tax that shoppers should be paying already but almost never do.
States across the country have seen a slowdown in the growth of sales tax revenue, in part because more and more shoppers are purchasing items over the internet where sales taxes are rarely collected. Massachusetts residents are supposed to pay tax on items they purchase out of state, but few do because there’s no easy way for states to track what they buy.
States can require retailers with a physical nexus in the state (stores, warehouses, or other facilities) to collect and remit sales taxes. But states have traditionally had little leverage on internet retailers who ship products to customers in states where they have no physical presence.
In his budget proposal for fiscal 2018, Baker estimated he could collect $30 million from highly-active, internet-only retailers who are based outside the state and have no physical presence in Massachusetts. State officials say the Massachusetts sales tax law is written in a way that makes sales in the state the equivalent of a physical nexus, thus requiring internet-only retailers to collect and remit sales taxes on purchases made by Massachusetts residents. Officials said the cutoff may be internet vendors with annual sales in Massachusetts worth $500,000.
South Dakota adopted a somewhat similar approach when it passed legislation last March requiring internet retailers who do $100,000 of business or complete at least 200 transactions annually in the state to remit sales taxes on purchases. South Dakota’s Revenue Department sent notices to 206 retailers, informing them they were likely subject to the law. Dozens of firms complied, but most did not.
South Dakota responded by filing a federal lawsuit against four of the companies – Wayfair LLC of Boston; Newegg Inc. of Industry, California; Overstock.com of Salt Lake City; and Systemax Inc. of Port Washington, New York. Systemax agreed to comply with the law, and was dropped from the suit, which was remanded to state court.
The South Dakota lawsuit and others like it may eventually end up before the Supreme Court, which ruled in 1992, long before the rise of the internet, that states could only force catalogue retailers with a physical presence inside their borders to collect sales taxes.
The Supreme Court in December let stand a lower court ruling upholding a Colorado law that compelled internet retailers to remit sales tax to the state or face burdensome reporting requirements, including turning over the names and addresses of Colorado customers and how much they purchase. The retailers were also required to notify customers of their responsibility to pay taxes on their purchases and provide billing summaries to anyone spending more than $500 a year.
Jon Hurst, president of the Massachusetts Retailers Association, has long pushed for internet sales to be taxed to create a more level playing field between internet and local bricks-and-mortar retailers. He welcomed Baker’s focus on the issue but said that, in the absence of federal legislation, state actions are likely to face prolonged litigation.
Hurst also said Baker appears to be targeting only a small percentage of internet retailers. He said the amount of sales going untaxed runs to the hundreds of millions in Massachusetts. “It’s a lot of money, and $30 million is a drop in the bucket compared to what’s out there,” he said. State officials, however, say most of the largest internet retailers, including companies like Wal-Mart, already have a physical presence in Massachusetts and collect sales taxes on the state’s behalf.
As for the insistence of Baker aides that the governor is not imposing a new tax, Hurst said they are technically correct. Customers are supposed to pay a so-called use tax on items they purchase out of state and use inside Massachusetts. “The tax is owed, but you and I know nobody ever pays their use tax,” he said.