Mississippi's Internet Sales Tax:
Answers to Common Questions
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The explosion of online retail sales has fostered a debate about whether and how to collect taxes on those purchases from companies that are not currently required to collect them. During the 2017 legislative session, the Mississippi House of Representatives passed a bill regarding this issue. That bill, HB 480, died in the Senate Finance Committee, but the issue itself is not going away.
The Mississippi Department of Revenue (DOR) has proposed a regulation very similar to the legislation. A major difference between the regulation and the legislation is that HB 480 would have directed that the taxes collected by certain out-of-state sellers be spent on road and bridge repair.
Although there are many aspects to this debate, this paper is intended to explain only a few of the policy matters involved. It does not seek to take a side, but to impartially explain the pertinent facts.
For the most part, we will deal with things as they are, not as they should or should not be.
Before we get started, an understanding of the terminology is important.
First of all, the internet sales tax is not really a "sales tax." It is a "use tax," which is a tax due on the purchase of property acquired "for use, storage or consumption within this State on which Sales or Use Tax has not been paid to another state...," according to the Mississippi Department of Revenue (DOR).
Use tax rates are generally the same as sales tax rates, but use taxes are treated differently in terms of where the money goes after it is collected by DOR. All of the use tax is retained at the state level while a portion (18.5%) of the sales tax is sent back to the Mississippi municipalities where the sales were made.
A company that has a physical presence in Mississippi is required to collect sales or use tax at the time of a sale. Whether companies that do not have a physical presence here may be required to collect and remit a use tax is a major point of the current debate and is discussed in this paper.
Is this a new tax? Is it a tax increase?
The answer to both questions is no, at least as applied to the tax itself. The process to collect the tax will be taxing - logistically, financially, and emotionally - especially for small businesses. But the use tax on the purchase itself is neither a new tax nor a tax increase.
Here's why. For every item you buy right now that is subject to sales or use tax, you are the one who owes the tax. It would have perhaps been more accurate to call it a "purchase tax" than a "sales tax." The tax is not on the business from which you purchased the item. The tax is assessed on the item itself, and you as the purchaser owe the tax.
In order to make it easier to identify and collect the tax, the state requires sellers (retail stores, for instance) to collect it for you. That's why it's not included in the price of the product but is identified as a separate item on your receipt. (In contrast, businesses include the cost of their own taxes, such as income or property taxes, in the underlying price of the product, not as a separate item on the receipt.)
Consider this analogy. You owe tax on your income. In order to increase compliance, the state requires your employer to withhold money from your paycheck and send it to DOR. That's not a tax on your employer. You are the one who owes the tax. If your employer doesn't withhold enough, you still owe the full tax on your income, and you are required to remit it when you file your tax return.
In the same way, if a retailer - in-state or out-of-state - collects an adequate amount of sales or use tax for you, you owe nothing more. But if the retailer does not collect it, you still owe it.
Whether you have noticed or not, or whether you have answered it truthfully or not, your Mississippi tax return asks you to identify the amount of purchases you made from out-of-state companies for which you did not pay sales or use tax. You are supposed to pay 7% of that amount to the state. Apparently, not many people do that.
If you buy an item in another state and the seller charges you sales tax in that state, you can deduct that amount from the use tax you would otherwise owe to the state of Mississippi. The very important exception to this: you cannot deduct sales or use taxes paid in another state on most motorized vehicles (cars, trucks, motorcycles, boats, etc.) whose first use will be in Mississippi. In other words, if you buy one of those items in another state, and it has not been used before, you will owe the full use tax in Mississippi even if you paid sales tax in the state where you bought it.
Since this will result in my paying more taxes than I do now, how is this not a tax increase?
The only reason you would pay more taxes under the new policy is if (a) you buy more online this year than last year, or (b) you haven't been paying the use tax you already owed. To say it is a tax increase to require you to pay what you owe would be analogous to saying it is a tax increase if you have avoided paying income tax in the past but now your employer will be required to withhold income taxes from your paycheck.
To summarize: the tax on purchases from out-of-state sellers is a tax that is owed now; it is not a new tax, and it is not a tax increase.
If the tax is already owed, what's the problem with requiring sellers to collect it?
Regardless of the merit of taxing internet sales, the issue hinges on whether one state can require companies in another state to collect a tax on its behalf if that company has no physical presence in the state. The U.S. Supreme Court has spoken directly to this question and determined that states cannot do that. The U.S. Constitution's "commerce clause" gives the U.S. Congress authority over interstate commerce. Thus far, Congress has not given states the power to require businesses beyond their borders to collect use taxes if those businesses do not have a physical presence in the taxing state.
If that's the case, has Congress shown any interest in allowing it?
Numerous bills have been introduced in Congress to allow states to do this, but none have become law. The U.S. Senate passed the "Marketplace Fairness Act" in 2013 to address this issue, but the House has never acted on it.
Since Congress has not acted, what governs internet tax collection?
Until Congress decides otherwise, a U.S. Supreme Court ruling sets limits on what states can do to collect taxes on interstate transactions. In the case of Quill v. North Dakota, in an 8-1 decision, the high court said that a state can only require businesses with a physical presence, known as physical "nexus," to collect taxes on the state's behalf. To allow otherwise, the court said, would be too expensive and burdensome for companies to try to comply.
If Congress does eventually pass a bill, what safeguards are likely to be approved for small businesses to deal with the complexity?
|How complex can it be?
The Wisconsin Department of Revenue has an entire webpage, with a description of 10 different scenarios, to explain how that state taxes ice cream cakes. In some cases, the determination of whether a cake should be taxed is based on whether or not a napkin is offered to the customer! https://www.revenue.wi.gov/Pages/TaxPro/news-2010-101108c.aspx.
Such detail, multiplied by the nearly 10,000 sales tax jurisdictions in the country, each with its own variety of rules about which items are taxed at which rates, and each of which has its own forms and filing requirements, makes compliance daunting, especially for small business owners who could potentially face expensive audits from dozens, if not hundreds of tax jurisdictions.
Any answer to this question is speculative, but there are some generally accepted protections that were in the Senate-passed bill in 2013 and are in proposals being considered currently by key House leaders. Here are three:
- Online sellers with less than $1,000,000 in remote sales annually would be exempt from collection requirements.
- States (or the federal government) would be required to buy and provide software for managing sales tax compliance, at no cost to the business that would be required to collect the tax.
- Retailers would not be penalized (would be "held harmless") for any errors that result from relying on state-provided software.
Are those safeguards in the proposed DOR regulation?
No. The regulation proposed by DOR would apply to any business selling a total of $250,000 or more to Mississippians in any given year. There is no provision to provide software. And unlike at least 24 other states, the DOR regulation offers no liability protection if sellers rely on sales tax collection software.
If the U.S. Supreme Court has said states cannot require out-of-state businesses with no physical presence in-state to collect these taxes, why would DOR or the legislature attempt to do so anyway?
DOR Commissioner Herb Frierson was quoted by the Associated Press as saying, "The whole purpose of it is to get the issue back in court and see if the Supreme Court will look at it again. What we're doing is probably unconstitutional, but we've got to do it to get another hearing." Other states including Alabama and South Dakota, are already in court attempting to force a reconsideration of Quill. Mississippi's proposed regulation is very similar to Alabama's regulation, so the benefit of inviting a lawsuit against Mississippi is unclear.
For the legislature,the apparent motivation behind HB 480 was to increase the amount of money being directed toward road and bridge repair, by allocating to that purpose the amount of use taxes collected and remitted by out-of-state sellers. Of that amount, 70% would have gone to the state Department of Transportation for state-maintained roads and bridges, and 30% to cities and counties for local road and bridge repair. Normally, the use tax goes into the General Fund, which is the primary source from which the legislature appropriates funds to schools, Medicaid, prisons, etc. Road and bridge funding comes primarily from the tax on gasoline and other fuels, generally referred to as the "gas tax."
Other Common Questions
Do out-of-state sellers enjoy an unfair benefit by not being required to charge taxes?
Those who would answer "yes" say local, brick-and-mortar retailers are placed at a competitive disadvantage because the cost of an online product is automatically 7% less to consumers since they aren't charged sales tax on the purchase. They say this hurts local business owners who provide jobs to people in the community, support local organizations such as sports teams and local charities, and are a significant source of local taxes that pay for schools, roads, and police and fire protection. And because they collect sales tax, not use tax, their communities receive 18.5% of the tax they collect on their sales, further benefiting their hometowns.
Those who would answer "no" say it is wrong to place the tax-collection burden on out-of-state sellers because the sellers don't use water and sewer infrastructure, or fire and police protection, or other benefits provided by local and state government to brick-and-mortar establishments. They also say buyers generally choose to purchase online more for convenience than price, so the 7% difference would not change the purchasers' buying decisions. In addition, they say sales tax collections have not declined despite the rise in online sales.
I noticed Amazon is now charging me 7% on the items I buy from them. If they aren't required to collect tax on their sales to Mississippians, why are they doing so?
There appears to be no statutory prohibition on an out-of-state company voluntarily collecting a use tax, even if the company is not required to do so, as long as it sends DOR the full amount it collects. Amazon has chosen to charge a use tax on items purchased directly from Amazon. For independent sellers who list their items on Amazon, a use tax is apparently not being collected. As to why Amazon has chosen to do this, the answer is not clear (see next question).
Do we know whether Amazon is receiving any special benefits as a result of their agreeing to collect a use tax?
No. Because DOR refuses to release the terms of its agreement with Amazon, we don't know exactly what was agreed to on either side. We don't know whether Amazon agreed to collect the tax only if DOR agreed to issue its currently-proposed regulation that would penalize other companies that don't do what Amazon has done. We don't know how long DOR is giving Amazon to remit those taxes, or how much Amazon is allowed to keep to cover their costs (other Mississippi businesses may keep up to 2% of the total tax they are remitting, not to exceed $50 per month), or any other actions or costs to which DOR may have obligated Mississippi taxpayers.
March 1, 2017
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