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Posts Tagged ‘Supreme Court’

Paying Sales Taxes

online shoppingBypassing the Senate Finance Committee, the Senate passed a bill on Tuesday which would allow states to collect sales taxes from the certain out-of-state retailers.  Since the bill hasn’t passed the House, it’s not law yet, and although the bill passed by a 69-27 vote in the Senate, the future in the House is much less certain.

So what does this mean for you if this bill eventually becomes law?  In theory… nothing.  In reality… you’ll be paying more taxes.

Here are a few relevant facts about sales and use taxes.

  • 45 States and the District of Columbia collect sales taxes.
  • Although referred to as a sales tax, the tax is technically a tax on the use of purchased property and services.  That’s correct… states charge you a tax for the “right” to use something you bought.
  • Since states don’t trust you to pay the correct or full amount of tax, they impose an obligation upon the seller to collect the tax at the time of sale.  Since this is the mechanism for most people paying the tax, it is primarily known as a sales tax.
  • States would like to impose the collection requirement upon every entity selling merchandise to a resident.  However, a 1992 U.S. Supreme Court case restricted a state’s right to impose a collection requirement to those sellers who had a physical presence in the state.

The original clashes over sales tax collection were prior to the advent of the internet and primarily involved mail order sales companies (i.e., those companies that constantly mail you catalogs).  With the boom of the internet and online shopping, the issues have become more nuanced and pronounced, as the battles involve state tax authorities, local retailers (i.e., brick and mortar businesses), online merchants, and governments needing more revenues to balance their books.

States estimate the unpaid tax exceeds $20 billion annually.  Understandably, most state and local politicians are pushing hard to get this legislation passed.   Brick and mortar businesses see it as leveling the playing field.  By not collecting sales taxes, the total purchase price of an item is less expensive, thereby providing an advantage to retailers who don’t collect sales taxes.

Having lived in Vermont for many years, I know the advantage to retailers not collecting sales taxes.  Vermont has a sales tax, and New Hampshire doesn’t.  New Hampshire retailers have a distinct advantage.  Although they may not advertise the absence of sales taxes, people from all over Vermont travel to New Hampshire to make purchases with the sole intent of avoiding the sales tax.

If you buy something out-of-state without paying a sales tax, you’re supposed to remit the required tax to your state tax authorities.  Whether it’s intentional, an oversight or a misunderstanding of the law, few people ever self-assess the taxes owed on their out-of-state purchases.   In all likelihood, if the tax is not collected at the time of sale, it will never be paid.

If the tax is paid by the customer not the seller, why such resistance to collecting the tax?  For most businesses, it’s the cost of compliance.  Sales taxes are assessed and collected at the state level, which means there are 46 different sets of rules.  For instance, clothing may be taxable in one state, but not in another.  Many states also allow city, county and municipal governments to assess their own tax.  As a result, a business would need to keep up with constantly changing rules in each jurisdiction, collect the tax and potentially file hundreds of tax returns.  The cost may easily be absorbed by a billion-dollar national retailer, but could be way too much for a local business selling a few items a week over the internet.

The new legislation changes the rules of taxation.  It’s intended to supersede the U.S. Supreme Court case and eliminate the physical presence requirement.  Essentially, any business selling more than $1 million to out-of-state customers would be required to collect and remit the tax to the appropriate tax authority.

Unless you live in Alaska, Delaware, Montana, New Hampshire or Oregon (states without a sales tax), the legislation is good news and bad news.  The good news is that your state will likely raise some additional revenue by collecting sales tax on purchased items being shipped into your state.  The bad news is you’ll likely be paying some of that tax.  If you’re a business owner looking to create an online sales presence, be prepared.   If you cross the sales threshold, you’ll be required to collect the tax on any sale in the U.S. and be ready to pay large fees to the software providers and professionals you’ll need to help stay in compliance.

The bottom line on this legislation is this

  • You’re ecstatic if you’re a politician looking to raise revenues or if you’re a brick-and-mortar business feeling like your online competitors have an unfair advantage.
  • If you’re a small business whose tax compliance burdens have just multiplied exponentially, you’re probably concerned with how much it’s going to cost you to comply with this mandate.
  • As an average citizen, you’re probably torn between being glad your state and local government will have more money and being unhappy that some of that money is coming from you.
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The Supreme Court Rules on Obamacare

In a 5-4 decision, the U.S. Supreme Court upheld the constitutionality of Obamacare (the Patient Protection and Affordable Care Act).  Lawyers, politicians, journalists and citizens are scouring the judicial rulings to understand its implications.  The law is exceptionally complex, so it will take time fully comprehend the ramifications of the ruling.

Here are a couple of the most significant elements of the Court’s ruling.

  • The penalty for failing to purchase health insurance is equivalent to a tax, which Congress has the authority to assess.  Thus, the individual mandate is Constitutional.
  • Congress does not have the power under the Commerce Clause to force you to purchase insurance.
  • Congress can require states to increase their Medicaid roles and provide financial incentives to do so, but it can’t withhold all Medicaid funding if it doesn’t.  It seems confusing and contradictory and will likely lead to further litigation.

Here are a couple of quick thoughts and observations.

  • The logic of the Court regarding the individual mandate was interesting.  Apparently, Congress can’t force you to purchase something, but they can tax or penalize you if you don’t.
  • The Medicaid issue is one of the most unclear parts of the ruling.  Unlike the individual mandate, it seems Congress can require the states to increase their Medicaid roles, but can’t penalize them if they don’t.  The issue hinges on state sovereignty, and it will be interesting to see how this plays out, especially since several states have already passed legislation opting out of Obamacare or the individual mandate.
  • The split ruling was no surprise, but it was a shock that Chief Justice John Roberts upheld the constitutionality and Justice Anthony Kennedy did not.  The unpredictability of judges and juries is what’s often referred to as the hazards of litigation.  No matter how strong you think your case is, a judge or jury may see it differently.

Today’s ruling by the Supreme Court isn’t going to end the discussions or fights over Obamacare.  There is still a lot more to come.

I welcome your comments and thoughts regarding the Supreme Court decision.  Click here if you would like to take a quick poll on whether you agree or disagree.