After Twenty Years Congress Still Has Not Acted On Sales Tax

Originally published on forbes.com.

Annette Nellen is a professor at San Jose State University. She has an excellent blog on tax policy called 21st Century Taxation. Professor Nellen was selected by the AICPA to tesitfy before Congress on the need for comprehensive tax reform.

Collecting Sales Tax – 20 Years of Waiting 

Annette Nellen, CPA, Esq.

In this Internet age, I'm surprised by the number of catalogs that show up in my physical mail box each week. I don't order from them, but they do sometimes cause me to visit the sender's website and place an order, in addition to reminding me to shop, I assume these catalogs help delay the financial collapse of the U.S. Post Office, as well.

The catalogs are also a reminder of a decades old tax issue: how can states collect sales tax on purchases their residents make from out-of-state companies?

Despite the world of catalog commerce being greatly expanded by the world of e-commerce, states must still rely on a catalog-era U.S. Supreme Court case that limits their ability to collect sales and use tax.

This year, the case – Quill Corp. v. North Dakota, 504 U.S. 298 (1992), reached its 20 year anniversary, still intact. Despite technological advances, the sales tax collection problem Quill addresses remains. In 1992, the Court observed that Congress was where states should go for help. Twenty years later, states still wait for that help.

So, what happened in Quill?

Without stores and employees in the state, sellers also save the cost of collecting sales tax in that state. In the 1980s, North Dakota thought that no longer made sense given how easy it was for companies to do business by just mailing catalogs. So it decided to challenge a 1967 Supreme Court ruling (National Bellas Hess) that stressed the need for physical presence for sales tax collection obligations.

In 1992, the Court held that there was no due process problem with a state imposing sales tax collection obligations on an active seller. However, the Court found a commerce clause problem with non-present sellers being subject to sales tax collection due to the existence of thousands of jurisdictions with non-uniform sales tax rules. Requiring out-of-state businesses to deal with that administrative nightmare would impede interstate commerce. So, the sales tax collection standard that has held since 1992 is that a state may only make a seller collect sales tax if the seller has a physical presence in the state.

With only the commerce clause standing in the way of broader sales tax collection, the court noted: "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

As we all know due to the number of times we are not charged sales tax for items ordered online or via catalogs, Congress has not exercised its authority under the commerce clause to change the Quill result. In theory, states still get the revenue because buyers are to self-assess use tax when sellers are not required to charge sales tax. Of course, in practice, states do not see a lot of that revenue. States would do much better if allowed to collect sales tax from thousands of vendors rather than hope for use tax from millions of consumers. States, as well as many sellers, want Congress to take action.

There are currently three proposals before the 112th Congress to change the holding of Quill:

The Main Street Fairness Act (H.R. 2701 and S. 1452)

The Marketplace Equity Act of 2011 (H.R. 3179)

The Marketplace Fairness Act (S. 1832)

The bills primarily differ in what a state would have to do to be allowed to collect sales tax from out-of-state vendors and the size of the de minimus rule to exempt small vendors from collection.

Congress knows states need the revenue and that "main street" businesses want the improved price competition that should result when their out-of-state competitors have to charge sales tax. We've got a few more months to see if 2012 will be the year Congress finally exercises its commerce clause authority that the Supreme Court reminded it of 20 years ago. What is your prediction?

For more information on the sales tax collection issue, see the author's "affiliate nexus" website and 21st Century Taxation website and blog.

You can follow me on twitter @peterreillycpa.

Connecticut Wants To Be Sure Elementary Students Learn To Pay Sales Tax On Books

Originally published on forbes.com.

I know states have a legitimate need for revenue, but squeezing pennies out of little kids buying their first books is really taking it too far.  That's what the Connecticut Department of Revenue will be doing thanks to this recent decision by the Supreme Court of Connecticut: SCHOLASTIC BOOK CLUBS, INC. v. COMMISSIONER OF REVENUE SERVICES

Do you remember the first book you bought with your own money ? I sure do - Thirty Seconds Over Tokyo by Captain Ted Lawson (Van Johnson played him in the movie

I even remember the problem I had writing the book report, because you had to say where the story was set.  Captain, then Lieutenant, Lawson went pretty much all around the world, leaving his B-25, The Ruptured Duck, and one of his legs in China.  By the way they really got the story of the Doolittle Raid totally wrong in the movie Pearl Harbor

I bought Thirty Seconds Over Tokyo at a fund raising auction, but I bet a lot of kids bought their first books from Scholastic Books Inc. I remember getting the book club brochures and I remember getting them for my own kids. I helped raise a couple of Barnes and Nobles junkies so Scholastic was not a big part of their book buying experience, on a percentage basis, but there must be many kids for which it is. I never realized how the whole thing worked and how much extra work it involves for the teachers. Hey, if you can read this, thank a teacher. The case gives a pretty detailed summary of the system.

The plaintiff conducts its mail order business by mailing catalogs monthly during the school year to classrooms at nursery, primary and secondary schools throughout the United States, including Connecticut. Solely as a result of their academic interest in choosing books and other items for their students and themselves, Connecticut teachers play the following role in the plaintiff's sales and distribution process.

Whether a teacher decides to participate in the program or any other book club is entirely the teacher's decision. If a teacher decides to participate, the teacher distributes the flyers to the students, who are expected to bring the flyers home to their parents. If there are not enough flyers, the teacher contacts the plaintiff for more. Sometimes, the teacher sends a “student memo” to the parents, a draft of which is supplied to the teacher by the plaintiff. The teacher also may purchase books from the catalog for the classroom or for gifts to students.

The individual selections are returned to the teacher with cash or checks from the parent or parents. A student with allowance money also may pay for the order with cash. [Hey, don't forget paper routes and collecting deposit bottles.] The teacher collects all of the orders and submits them to the plaintiff, and may add his or her own order to the total. Although a teacher may delegate the collection of an order to a “parent helper,” the order is submitted under the teacher's name and account number. The teacher may order online from the plaintiff with a credit card and may have the option of using a discount coupon. All orders are processed and filled in Jefferson City, Missouri. If the order is calculated incorrectly, the plaintiff contacts the teacher.

The books are delivered to the teacher by common carrier with a packing slip addressed to the teacher. A list addressed to the teacher is enclosed with the order and shows the boxes contained in the delivery. The teacher distributes the order to the students.

It seems like Scholastic did a pretty good job of avoiding nexus, but the Achilles heel of the system was the teachers. Here is how Scholastic looked at it:

The plaintiff has been selling its products in this manner to Connecticut schoolchildren for many years. It is the plaintiff's view that teachers are acting to assist students in their purchase of books “in loco parentis,” or in their role as surrogate parents.

That is not how Revenue Services and the Court saw it.

...we conclude that the Connecticut schoolteachers who participate in the plaintiff's program may be considered its representatives. The trial court found that the plaintiff is a “for profit” mail order business that distributes its books and related products “only through schools,” that approximately 14,000 teachers “participate in [the plaintiff's] programs” and that the plaintiff has no other personnel or means of selling its products in Connecticut. Accordingly, the teachers serve as the sole conduit through which the plaintiff advertises, markets, sells and delivers its products to Connecticut schoolchildren.

It seems like adding sales tax probably would not upset the whole Scholastic business model that much and of course Scholastic is stuck paying the 3 million or so it did not collect from the kids. I still don't like it, at all.  Sure the state is getting a big revenue hit from them on this case, but from here on in it will be the kids paying.  I'm really annoyed at Connecticut for chasing this one grabbing a few pennies from some kid who is buying his first book. It is even more aggravating than Chautauqua  County in Kansas saying that the Boy Scouts are not a humanitarian organization. At least the Court got that one right.

What's Next ?

I have to admit that the case has awakened my dark side. People are making big money ratting out tax cheats to the IRS, something I find very disturbing. Anyway if the State of New Jersey ever gets into that game I have something for them. Most little kids think all adults are old, but the first graders at Saint John's in Fairview in 1959 could tell that Sister Ellen Michael was young. That's because the rest of the Franciscans teaching and terrorizing the budding juvenile delinquents really were old. Like maybe a couple of them were recruited by Saint Francis. Anyway Sister Ellen Michael used to sell us pretzel rods for $.02 a piece and I'm sure she wasn't collecting sales tax. With all the interest and penalties I'll bet that would really add up. The mother house used to be in Peekskill, NY so it might not be that hard to hunt her down. Before you haul her off though, please thank her for teaching me how to read.

You can follow me on twitter @peterreillycpa.