In the world of tax, just about every eye is fixed on Monday, otherwise known as Tax Day, April 18. Soon after Tax Day, however, Senator Dick Durbin (D-IL) is expected to introduce a bill into the Senate called The Main Street Fairness Act. We won’t know the details until the bill is introduced, but right now what’s clear is the bill’s general intent: to allow states to collect sales tax from online retailers like Amazon.
It all goes back to a 1992 Supreme Court ruling which held that states can only charge sales tax on companies who have a nexus in their state. “Nexus” means a business presence and most commonly that translates to having a physical, brick and mortar presence in the state. In Illinois, for example, Barnes & Noble charges sales tax (because it has physical stores in the state) but Amazon does not (because it’s presence is online only). A new law in Illinois was recently passed that expanded the definition of nexus to include having affiliate programs with Illinois residents, but as was the case with counterpart laws in North Carolina and Rhode Island, the response of online retailers was to cancel their affiliate programs.
The 1992 ruling left open the possibility of Congress passing new legislation, allowing states to collect sales tax on companies without a nexus in their state, and that’s exactly what Durbin’s act proposes to do.
It should be noted that even today, when states are not allowed to charge sales tax on companies without a nexus in their state, online purchases are not actually tax free. Amazon may not charge sales tax, but the buyer is expected to declare those purchases on their annual tax forms and to pay the tax themselves. This is called use tax and although it’s been the law for a very long time, few people actually declare and pay it.
An alternative to Durbin’s plan (or perhaps an ally to it, depending on how things pan out in Washington) came about in 2002. The Streamlined Sales Tax Agreement is designed to alleviate one of the chief difficulties in establishing a national sales tax policy, namely the fact that there are around 7500 tax jurisdictions in the United States, each with their own rules and policies. To date 24 states have joined the agreement. The idea is to streamline and unify the various tax codes to make sales tax on a national scale more feasible.
We won’t know the details until Durbin introduces the bill.
For more information, contact the Illinois tax attorneys at Horowitz & Weinstein.