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Mass. Will Collect Sales Taxes On Online Purchases July 1 (If There's Not A Legal Fight First)04:42Download

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"[W]e believe the proper solution is for the federal law to change in a way that actually has every state collecting from every online retailer," said Wayfair CEO Niraj Shah.
(Jesse Costa/WBUR)MoreCloseclosemore
"[W]e believe the proper solution is for the federal law to change in a way that actually has every state collecting from every online retailer," said Wayfair CEO Niraj Shah. (Jesse Costa/WBUR)

Starting July 1, out-of-state online retailers selling in Massachusetts will be required to start collecting the state sales tax. The Baker administration estimates this new rule could bring in roughly $30 million for the next fiscal year.

But this extra cash isn't free. It comes with the added risks of a legal fight.

Seeking A 'Level Playing Field'

As a result of a 1992 Supreme Court decision states can only force internet retailers to collect sales tax if they have a physical presence in the state. And so with that logic, there's no debate when it comes to Amazon -- you already pay state taxes if you purchase, for example, paper towels on the mega e-commerce site. (Amazon acquired Massachusetts-based Kiva Systems in 2012 and operates warehouses in Massachusetts.)

But the same isn't true of other online retailers.

If you went to Overstock.com, for example, and picked out a new air conditioning unit, it would appear to be "tax-free" when you inserted your credit card details. Overstock doesn't charge sales tax in Massachusetts because it doesn't have a physical presence in the state.

You are still required to individually calculate and pay Massachusetts' 6.25 percent sales tax when you buy something online from a retailer that doesn't collect it, such as Overstock. You're supposed to do this when you file your annual taxes.

But, in reality, most people don't know that. And there's nobody actively enforcing the rules.

"It's really not the best way of collecting a sales tax," said Bill Rennie, vice president of the Retailers Association of Massachusetts. "For years, retailers here and across the country have argued for a level playing field."

Brick-and-mortar stores claim the current tax system hurts their businesses; people know they can buy the exact same item online and avoid paying sales tax.

"It's become much more important each year now with the growth of mobile commerce," Rennie said. "Folks can shop and comparison shop and purchase anywhere they want from their smartphones."

State officials saw the same trend and realized they were leaving potential tax revenue on the table.

"More and more states are looking at what they can do on their own because the Congress has basically failed to address the issue."

Michael Mazerov, the Center on Budget and Policy Priorities

How States Are Stepping Up

The National Conference of State Legislatures estimated that in 2015 states lost roughly $17 billion in uncollected taxes from electronic sales.

To close that gap, the Massachusetts Department of Revenue issued a directive for out-of-state online retailers. If you're a company that had 100 or more sales within Massachusetts that totaled at least $500,000 last year, you'll have to start collecting sales tax from online shoppers.

"More and more states are looking at what they can do on their own because the Congress has basically failed to address the issue," said Michael Mazerov, senior fellow with the Center on Budget and Policy Priorities in Washington, D.C.

Perennially, a group of lawmakers introduces federal legislation that would allow states to collect sales tax from online retailers, but the bills have never made it into law. The latest iteration, the Marketplace Fairness Act, was introduced in April. (Massachusetts U.S. Sens. Elizabeth Warren and Ed Markey have both co-signed the bill.)

But in the last few years, in the absence of real congressional change, many states have begun to push back with state solutions.

The most common approach adopted by states is the so-called click-through nexus law, which expands the definition of what it means to be an in-state retailer.

But some states (and local businesses) see the physical presence rule as an outdated way of thinking in the era of smartphone shopping. A 2016 law in South Dakota directly questions the physical presence requirement -- and requires retailers that sold more than $100,000 or 200 sales to collect and remit taxes. The state sued three big online retailers -- Massachusetts-based Wayfair, Overstock and Newegg — to enforce the new law and collect sales tax.

Wayfair, of course, pays taxes in Massachusetts since it's based in Boston, but it doesn't collect taxes in South Dakota because it doesn't have a physical presence there.

The company's CEO, Niraj Shah, insists Wayfair is merely "trying to follow the law."

"In the absence of federal law, you can get states trying to create their own definitions ... in a way that creates a lot of confusion," Shah said. "And so that's why it really needs a federal solution ... we believe the proper solution is for the federal law to change in a way that actually has every state collecting from every online retailer."

But without any immediate federal changes on the horizon, the decision is left to individual companies, like Amazon, which began collecting sales tax nationwide April 1 on its own; or states, like Massachusetts, which are creating rules based on their own legal interpretation.

Does A Computer Cookie Create A Physical Presence?

A number of states have already crafted rules to close this tax loophole, but the legal justification Massachusetts is using to expand the tax pool is somewhat unprecedented.

"The thing that's gotten the most attention in the Massachusetts directive is the language," said CBPP's Mazerov. "[It] talks about the fact that internet retailers may be using smartphone apps or cookies and that under the directive obligates them to collect tax in the state."

Essentially, it's an internet answer to an internet problem.

Massachusetts is adopting an overly literal definition of the 1992 Supreme Court ruling, saying that cookies stored locally on your computer or a shopping app you download to your phone creates a physical in-state operation for a company.

To some, this Massachusetts tax theory of physical presence is sheer genius; to others it's a shameless tax grab.

Steve DelBianco is on the shameless side. He leads NetChoice, a national trade association representing e-commerce and online businesses.

"Massachusetts has this unique theory of electronic presence," DelBianco said. "But under that theory, your business is subject to the taxation [and] regulation in any state where a user simply enters your website address. That can't hold up to legal scrutiny, 'cause it certainly doesn't hold up to common sense."

For DelBianco, the only option left is a legal challenge to fight the idea that a cookie on your computer is the same thing as a storefront on Newbury Street. He said his group has sued a number of other states for online sales tax laws and he's looking at a legal fight in Massachusetts too.

"We're researching the legal arguments and raising the funds to pursue a lawsuit right now," DelBianco said. He said it's "too soon to say when we'll be ready."

This segment aired on May 10, 2017.

Asma Khalid Twitter Reporter
Asma Khalid leads WBUR's BostonomiX - a new biz/tech team covering the innovation economy.

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