Multistate Sales Tax Complexities Require Big and Small Reforms

Remote selling has become a huge part of the US retail sector. Beyond the impacts of Covid-19 on brick-and-mortar shopping, consumer habits have been trending in this direction since the launch of Amazon Prime nearly two decades ago. The Census Department reported that, in the fourth quarter of 2022, e-commerce made up about 15%—more than $260 billion—of the total retail market share.

While current inflation will slow retail sales—including in the e-commerce sector—online business is expected to keep expanding even at moderated levels, according to the National Retail Federation. But with that rising tide comes a complex set of sales tax laws that govern more than 10,000 tax jurisdictions across the country.

Retailers must figure out how these laws affect where sales tax should be applied and subsequently remitted. Even for the most diligent and well-meaning retailer, compliance with these confusing and sometimes conflicting regulations is a monumental task.

It doesn’t have to be that way. A November report from the Government Accountability Office urged Congress to work with states “to establish nationwide parameters for state taxation of remote sales. Such parameters should balance state interests with the need to address multistate complexities. The parameters should improve the overall system’s alignment with the criteria for a good tax system and help address existing uncertainties regarding what remote sales taxation is legally permissible by states and localities.”

This is a welcome development for online retailers that have struggled to keep up with what the GAO calls in the report “a complex patchwork of requirements” that govern taxes on remote sales.

Given the GAO’s mandate to provide Congress with fact-based (rather that politically motivated) assessments on how to improve government performance and accountability, it’s not surprising that the GAO set its sights on the remote sales tax system—especially in the wake of the sweeping tax policy changes that resulted from the 2018 Supreme Court ruling in the Wayfair nexus case.

The report raises three concerns about remote sales reporting that these apprehensions center on:

• Equity: Similarly situated taxpayers should receive similar treatment, but they don’t under the current system. Remote sellers grapple with a patchwork of requirements in all the taxing jurisdictions in which they have economic nexus, while traditional brick-and-mortar sellers only need to address sales tax rules in the jurisdictions where they are located.
• Economic efficiency: GAO research shows that many remote sellers have diverted resources from business operations and investments to tax compliance. Other remote sellers have limited the number of states where they sell to reduce their compliance burdens.
• Simplicity, transparency and administrability: These hallmarks of a good tax system are often lacking as evidenced by the substantial time and effort remote sellers allot to understanding and fulfilling numerous remote sales tax obligations.

Taking on these challenges won’t be simple or easy. The strategy requires a combination of incremental and comprehensive reforms, as well as buy-in from parties across governments and sectors. But that doesn’t mean there aren’t ways to get started now.

One proposed incremental fix involves a single point of registration, filing, administration, and audit for all states. The challenge remains as to whether states would welcome a single, unified filing and audit administration, especially under federal organization or oversight. At present, this may be constitutionally debatable.

Comprehensive reforms are trickier because they extend across states and take a lot more cooperation. The GAO report indicates states should be participating in an interstate collaboration by which they agree on uniform standards and centralized processes. This would make it easier for remote sellers to comply because they’d only have to understand the rates and process of a broad region rather than different ones for each individual jurisdiction.

The GAO also highlights a moonshot recommendation that’s worth mentioning. The report states it would be beneficial for Congress to adopt federal legislation that establishes nationwide parameters for state taxation and remote sales. Again, with a volatile and politically divided Congress, this fix is unlikely. But in their argument for national regulations, they make a compelling congressional argument for the constitutionality of the recommendation, citing that under the Commerce Clause, Congress can regulate interstate commerce.

The GAO report addresses the complexity of multistate taxation for remote sellers. Further, the Multistate Tax Commission’s uniformity committee continues to develop effective recommendations for optimizing compliance while reducing the burden on marketplace facilitators and remote sellers. It published its final white paper in July 2021.

Producing a model that established strong parameters for commercial marketplaces for their responsibilities for charging, collecting, remitting, and recording sales tax for remote sellers. However, in March 2023, the Multistate Tax Commission also presented its six goals for uniformity of sales taxes on digital products and developing further guidance to states. The commission is preparing a detailed white paper on sales taxation of digital products.

The complexities of sales tax around e-commerce are only getting more layered. The GAO and other organizations are on the right track with recommendations to address sales tax compliance in the online selling landscape.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael Bernard is the chief tax officer and vice-president of tax content at Vertex, Inc.

We’d love to hear your smart, original take: Write for us.