COLLECT TAXES ON INTERNET SALES

Senate Bill 658 (S-3)

Sponsor:  Sen. Jim Ananich

Senate Bill 659 (S-3)

Sponsor: Sen. Jim Ananich

House Committee:  Tax Policy

Senate Committee:  Economic Development

Complete to 12-17-14

A SUMMARY OF SENATE BILLS 658 & 659 AS PASSED BY THE SENATE 12-11-14  

The bills address the topic of the taxation of remote sales, include sales that are attributable to e-commerce.

 

Senate Bill 658 (S-3) would amend the General Sales Tax Act (1933 PA 167) to put into statute several presumptions concerning when a person selling tangible personal property is "engaged in the business of making sales at retail" in Michigan. 

Under the General Sales Tax Act, a tax is levied upon and collected from all persons "engaged in the business of making sales at retail," by which ownership of tangible personal property is transferred for consideration; the sales tax rate is six percent. 

Senate Bill 659 (S-3) would make a complementary amendment to the Use Tax Act (1937 PA 64).  Under the bill, a person selling tangible personal property would have to register with the Department of Treasury to collect the use tax, and would be personally liable for the tax, when the conditions of the presumptions are met. 

The bills are essentially the same as the versions of House Bills 4202 and 4203 that are on Third Reading in the House of Representatives.

 

Related Person Presumption

Under the bills, a person who sells tangible personal property to a customer in Michigan (i.e., a "seller") would be presumed to be engaged in the business of making sales at retail in Michigan if the seller or a person, including an affiliated person, other than a common carrier acting as a common carrier, does any of the following in the state:

–                    Sells a similar line of products as the seller and does so under the same, or similar, business name as the seller. 

–                    Uses its employees, agents, representatives, or independent contractors in the state to promote or facilitate sales by the seller to purchasers in this state. 

–                    Maintains, uses, or occupies an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the sale or delivery of tangible personal property sold by the seller to the seller's purchasers in this state. 

–                    Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller, with the sellers consent or knowledge. 

–                    Delivers, installs, assembles, or performs maintenance or repair services for the seller's purchasers in this state. 

–                    Facilitates the sale of tangible personal property in this state to purchasers in this state by allowing the seller's purchasers to pick up or return tangible personal property (sold by the seller) at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state.

–                    Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions related to activities occurring with the seller to establish or maintain the seller's market in this state.[1] 

–                    Conducts any other activities in Michigan that are significantly associated with the seller's ability to establish and maintain a market in the state for the seller's sales or tangible personal property to purchasers in this state. 

This presumption could be rebutted by demonstrating that a person's (including an affiliated person's) activities in the state were not significantly associated with the seller's ability to establish or maintain a market in the state for the seller's sale of tangible personal property to purchases in the state. 

As provided above, "affiliated persons" would be subject to the sales and use taxes if they meet certain criteria.  An "affiliated person" would be defined as (1) any person that is part of the same controlled group of corporations as the seller, or (2) any other person or entity that, notwithstanding its form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same controlled group of corporations. 

Agreements-with-Residents Presumption

A seller would be presumed to be engaged in the business of making sales at retail if the seller enters into an agreement (directly or indirectly) with one or more Michigan residents whereby the resident, for a commission or other consideration, directly or indirectly, refers potential customers to the seller (whether by a link on an internet website, in-person oral presentation, or otherwise), if both of the following conditions are met:

–                    The cumulative gross receipts from sales by the seller to purchasers in Michigan who are referred to the seller by all residents of the state with an agreement with the seller are greater than $10,000 during the prior 12 months. 

–                    The seller's total cumulative gross receipts from sales to purchasers in the state exceed $50,000 during the prior 12 months. 

This presumption could be rebutted by demonstrating that the resident (with whom the seller has an agreement) did not engage in any solicitation or any other activity in the state that was significantly associated with the seller's ability to establish sales of tangible personal property to customers in the state. Evidence to rebut the presumption could include written agreements prohibiting all residents (with whom the seller has an agreement) from engaging in any solicitation activities in the state on the seller's behalf or good faith written statements from all residents (with whom the seller has an agreement) stating that they did not engage in any such solicitation or other activities on the seller's behalf during the preceding year. 

An agreement under which a seller purchases advertisements from a person delivered through television, radio, print, the internet, or any other medium would not be an agreement described in the bill unless such advertisement revenue paid to the person consists of commissions or other consideration based upon completed sales of tangible personal property. 

Application Date

The bill would apply to transactions occurring on or after the bill's effective date (October 1, 2015), irrespective of the date the seller and resident entered into any referral agreement (as described above).  For the purposes of sales/use tax obligation on sales made via a referral agreement with residents, the 12 months before the bill's effective date would be included as part of the 12-month period to determine the amount of cumulative gross receipts. 

                                   

FISCAL IMPACT:

According to the Department of Treasury, an estimated $444.5 million in sales and use tax revenue resulting from remote sales will be uncollected in FY 2014-15, $281.6 of which is attributable to e-commerce (about 63%).  In FY 2015-16 the loss increases to $463.1 million, with $304.3 (65.7%) representing online purchases. The estimated sales and use tax due on all remote sales has been increasing by approximately 6% per year, due primarily to the very strong growth in e-commerce. Beginning with tax year 1999, the State included a line on the individual income tax return to encourage taxpayers to voluntarily remit the use tax owed. Based on tax returns processed through the first week of December, approximately $6.64 million has been collected from 116,430 tax returns reporting a use tax liability in 2014.

As written, the bills could generate some additional sales and/or use tax revenue for the state, estimated to be around $50 million per year with a large margin of error.  Major online retailers (Amazon, Overstock, eBay, etc.) can avoid nexus in Michigan by eliminating affiliate partners and/or relocating warehouses located in Michigan to other states, a practice that has been adopted in the past when online vendors have faced similar laws elsewhere.  If this were to occur, the bills could bring in $0 additional revenue.

It appears as if the bills have been structured so that the majority of any revenue collected would be classified as sales tax, although it would ultimately depend on how it is remitted by the taxpayer. One-third of use tax revenue is earmarked to the School Aid Fund (SAF), while the remaining two-thirds is General Fund/General Purpose (GF/GP) revenue. Roughly 73% of sales tax revenue is earmarked to the SAF and approximately 10% is dedicated to Constitutional revenue sharing; the remainder accrues to the general fund.

BACKGROUND INFORMATION:

The following was provided as Background Information in the summary of House Bills 4202 and 4203 dated September 9, 2013.  It has not been updated for this document.

In 1937 Michigan enacted the Use Tax Act (Public Act 94) as a companion to the General Sales Tax Act.  Where the sales tax is a tax on retail sales of personal property (unless exempt) made inside the state, the use tax is levied, generally speaking, on remote sales (such as those made though the Internet or mail order catalogues) and on out-of-state purchases of products that are then brought back into the state for storage, use, and consumption.  The use tax is a necessary supplement to the sales tax, as many taxpayers could otherwise avoid the sales tax by making purchases in other states.  (The need for this was greater when the act was originally enacted, as there were fewer states with a sales tax).  The use tax does not apply to transactions that are subject to the sales tax, and the taxpayer receives a credit for taxes paid to other states, so that a Michigan resident who purchases a product in another state and pays an equivalent amount of sales tax in that other state is not liable for the use tax in Michigan. 

While the sales and use taxes are in some ways very similar - and easily confused – they differ significantly in their administration and rate of compliance.  The statutory incidence of the sales tax is on retailers, as the tax is technically a tax on the privilege of doing business in the state.  Although retailers can shift the incidence of the tax to consumers, by adding the tax to the purchase price of products, they are legally obligated to file a sales tax return and remit the appropriate amount of tax to the state. 

In general, the statutory and actual incidence of the use tax, by contrast, falls on consumers.[2]  For the most part, the tax is self-reported by the taxpayer, and the state is limited in its ability to enforce the tax.  The state does enforce collection of the use tax in cases where purchases subject to the tax are required to be registered, such as automobiles, boats, and airplanes, but as a practical matter, compliance with the use tax in other cases has been considered voluntary.  The problem of noncompliance with the use tax is far from new, although it has grown in importance with the advent of the Internet and the expansion of "e-commerce."  In 1999, the state income tax form was amended to include a line for taxpayers to use in reporting any use tax due on products purchased in the tax year as a means of improving enforcement and collection. 

Enforcement of the use tax has been a problem for Michigan and other states for some time.  Many taxpayers are unaware of their use tax liability, while others simply ignore it altogether.  Moreover, states have had limited success in court when trying to require remote sellers (those outside of the state) to collect and remit use taxes on purchases by state residents.  The problem largely stems from two key United States Supreme Court cases, National Bellas Hess, Inc. v. Department of Revenue of Illinois 386 U.S. 753 (1967)[3] and Quill Corp. v. North Dakota 504 U.S. 98 (1992).[4]  Generally speaking, the court, in National Bellas Hess, ruled that an out-of-state business with no physical presence ("nexus") in a state could not be required to collect and remit use tax on goods purchased by residents of that state.  Requiring collection, the court held, would violate the Commerce Clause of the U.S. Constitution (Article 1, Section 8, clause 3). The Quill decision, as it relates to the Commerce Clause, reaffirmed the court's ruling in Bellas Hess, requiring physical presence.[5] 

A new effort to improve compliance and collections began in earnest in 2000 with the development of the Streamlined Sales Tax Project (SSTP), which involved 32 states, including Michigan, and six observer states, as well as input from businesses and local governments.  The mission of the project was to develop and implement a simplified and uniform sales and use tax system that will encourage voluntary use tax compliance.  This has proven to be a daunting task, as 34 of the 45 states with a sales tax allow local sales taxes, and 30 states have multiple rates.  (The issue of multiple taxing jurisdictions within the states is particularly problematic.)  Further, states often treat the same products differently and have different kinds of exemptions and definitions in their tax laws, all of which complicate the creation of a multi-state system.

In November 2002, several participating states, including Michigan, ratified an agreement specifying the changes in the sales and use taxes needed for each state to be in compliance with the agreement.[6]  The agreement requires states to adopt a state-level administrative process, implement a common tax base, and provide a transparent system to notify vendors of tax rate and tax base changes.  The agreement also contains uniform provisions related to sourcing nontraditional sales and telecommunication fees and taxes, and simplified administrative procedures, includes the treatment of exemptions, the filing of returns, and the recovery of bad debts. Public Acts 172-175 of 2004 allowed the state to become a participant in the SSTP and made the necessary changes to allow state tax law to be substantially in compliance with the agreement. 

In recent years, a handful of states have enacted so-called "Amazon laws" (in reference to the online retailer) in an effort to collect some portion of the tax owed on purchases made over the Internet.[7]  States have enacted three basic approaches aimed at improving compliance (and increasing collections):  referrer-nexus, related-entity nexus, and information-reporting requirements.[8]  These laws attempt to establish a nexus with the remote seller, creating a statutory responsibility for the seller to collect and remit sales and use taxes on remote purchases.  Laws (such as a 2008 New York law) that establish referrer-nexus are also referred to as "click-through nexus," and impose a tax liability if the remote seller has an agreement with in-state residents under which the in-state resident, directly or indirectly, refers potential customers to the seller, getting some commission or other consideration in return.  These laws may also impose a requirement that the seller's sales from these referrals exceeds certain limits, with the New York law, again, being an example.[9]   

Related-entity nexus laws, also referred to as affiliate nexus laws, impose a use tax liability if the remote seller is controlled by or controls an in-state business or is under common control with an in-state business or when an in-state firm and the remote seller use identical or substantially similar names, trade names, trademarks, or goodwill to facilitate sales or coordinate their businesses.[10] This approach disregards the corporate structure, treating separate legal entities (e.g., a corporate parent and its wholly-owned subsidiary "dot-com") as a single unitary business group for taxation purposes. 

The third approach, rather than imposing a responsibility to collect and remit taxes, requires remote sellers to provide information to state taxation departments on sales to in-state residents, to facilitate the payment of applicable taxes by customers.  Colorado and North Carolina enacted such laws.[11]        

On May 7, the U.S. Senate passed S. 743, titled the Marketplace Fairness Act of 2013 by a vote of 69(Y) – 27(N).  The bill would authorize member states of the Streamlined Sales and Use Tax Agreement (or non-member states that enact legislation simplifying sales/use taxes) to require remote sellers with gross sales receipts in the U.S. above $1.0 million to collect and remit sales and use taxes.  The bill was referred to the House Judiciary Committee, Subcommittee on Regulatory Reform, Commercial and Antitrust Law. 

                                                                                           Legislative Analyst:   Adam Desrosiers

                                                                                                                           Mark Wolf

                                                                                                  Fiscal Analyst:   Jim Stansell               

■ This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.

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