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GAO Recommends Federal Solution to 'Patchwork' of Online Sales Tax Collection

S.J. Steinhardt
Published Date:
Nov 15, 2022


A 2018 U.S. Supreme Court ruling that allowed states to collect sales taxes from businesses without a physical presence in the state resulted “in a complex patchwork of requirements with wide variation,” a new report from the Government Accounting Office (GAO) found, necessitating a congressional fix. The GAO is therefore  recommending that Congress "consider working with states to establish nationwide parameters for state taxation of remote sales."

The GAO undertook the study to examine the effects of states’ expanded authority to collect remote sales tax that was afforded them under the high court’s ruling in the case of South Dakota v. Wayfair. After the ruling, “[s]tates responded quickly with new remote sales tax requirements, resulting in a complex patchwork of requirements with wide variation," the report found. As a result, "[b]usinesses reported that they incurred software costs to expand their multistate tax collection capabilities, audit and assessment costs associated with increased tax jurisdiction exposure, and costs to stay current with legal requirements in multiple jurisdictions."

The GAO report looked at the current landscape of state remote sales tax requirements; the number of businesses subject to these requirements and the amount of revenue states have generated as a result; the types of costs businesses have incurred complying with these requirements; and the extent to which the overall remote sales tax system aligns with the criteria for a good tax system.

“Two fundamental objectives of tax policy are (1) to raise revenue sufficient to fund projected government spending, and (2) to do so in a manner consistent with three long-standing and widely accepted criteria for a good tax system: equity; economic efficiency; and a combination of simplicity, transparency, and administrability. In the more than 4 years since the Wayfair decision, concerns have been raised regarding the extent to which the overall remote sales tax system aligns with these criteria,” the report said.

“Across state and local taxing jurisdictions, a complex patchwork of requirements are in place governing the taxation of remote sales,” the report read. “These requirements vary in numerous respects, each of which multistate sellers need to be aware of and comply with.”

To address this complexity, the GAO recommended that Congress consider working with states to establish nationwide parameters for state taxation of remote sales, taking into account each state’s various interests. "Such parameters should balance state interests with the need to address multistate complexities," the GAO report said. "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."

Congress has attempted to address this issue in past years, Accounting Today reported, with such legislation as the Marketplace Fairness Act. That legislation did not pass either chamber.

The GAO estimated 2021 nationwide remote sales tax collections to be about $30 billion, basing that number on state-reported data.

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