If you have been paying attention to our Tax Outline, or are just a frequent online shopper, you may already know that late last year the state started requiring online retailers with a nexus in the state to collect and remit the state sales tax. So why is the state House of Representatives working on bills focused on the issue? The drafted legislation addresses questions of market fairness and extends the standards that were applied last year to a larger set of online transactions.
The Online Sales Tax Issue and Current Law
Prior to the United States Supreme Court’s Wayfair decision, in- and out-of-state online retailers were treated differently when it came to levying sales taxes. Federal interstate commerce rules required remote vendors to have a physical presence in the state before they could be required to collect the state’s sales tax. This created a tax competitiveness issue, as sales made in-store and online from Michigan retailers were more expensive than those from out-of-state vendors. While the purchasers were technically required to remit a use tax payment for those out-of-state purchases equivalent to what would have been paid in sales tax, compliance with that requirement was low.
When the U.S. Supreme Court ruled in Wayfair that states could collect online taxes from out-of-state retailers, the Michigan Department of Treasury issued an administrative rule requiring any online seller that either sold products worth $100,000 or more or made 200 or more transactions to Michigan residents to collect and remit the state sales tax, even if they had no physical operation in the state.
This shift has brought in significant revenue.The May Consensus Revenue Estimating Conference projected that net sales and use tax revenue would increase by $168 million for FY2019, and $225 million for FY2020.
The Marketplace Problem
While the new rule had a sizable effect, it still leaves a significant amount of sales tax revenue on the table. Many online retailers — like Amazon and eBay — and even some conventional retail stores’ websites (like Walmart) utilize a ‘marketplace’ style approach. While some items purchased on Amazon might be sold by Amazon itself (and thus subject to taxation), a large portion of sales are actually made by independent, third-party vendors. Sales made by those independent sellers may or may not require the seller to collect the sales tax.
The fairest application of a tax applies it uniformly across the entire tax base. Exceptions create distortions and incentives for buyers to choose the non-taxed option. Leaving marketplaces outside of the tax structure creates incentives for buyers to choose out-of-state vendors, creating an uneven playing field.
The bills passed by the House would effectively end this marketplace distortion. In addition to codifying the current Treasury Department rule by the (preventing future administrations from changing rules without legislative action), the proposed laws would require marketplace facilitators to automatically collect sales taxes for all goods sold to Michigan residents, regardless of who is selling on their website. The House Fiscal Agency estimates that this would increase state revenues by $120 million over a full year. The majority of that revenue would go to the School Aid Fund.
So while it may seem like déjà vu to hear that the state is collecting the sales tax from online purchases, these new changes move towards more uniform implementation. And these changes will increase state revenue without increasing tax rates.