Congress should pass out-of-state e-commerce sales tax legislation, watchdog says

New laws are needed to standardize sales taxes for e-commerce businesses that operate across state lines, a new report from the federal government’s internal watchdog recommends.

The report describes state laws that govern taxation on goods and services purchased online as a “complex patchwork of requirements with wide variation” and says that Congress could provide some much needed clarity and simplicity on the matter with some national legislation.

The report from the Government Accountability Office (GAO) recommends that “Congress consider working with states to establish nationwide parameters for state taxation of remote sales. Such parameters should balance state interests with the need to address multistate complexities.”

It’s not clear to what extent out-of-state sales taxation is legal for states, counties and towns, the report states.

“Uncertainty exists regarding what connection … a business must have with a state before the state may require the business to collect sales taxes on its behalf; when remote sales tax requirements violate the Constitution’s prohibition on state laws that discriminate against or impose an undue burden on interstate commerce; and under what circumstances locally-administered remote sales tax requirements are constitutionally permissible,” the report says.

The origin of the confusion, according to the GAO, lies in a 2018 U.S. Supreme Court decision that ruled companies could still have to pay taxes in states where they do business even without a physical presence in that state.

States responded to the ruling with their own new out-of-state sales tax laws. As more businesses have moved online in the years since, these laws have grown to encompass more commercial activity and have ultimately grown more complex, both internally and in the way that they relate to laws in other states.

“For example, states established different monetary and transactional … thresholds exempting some small businesses from remote sales tax requirements and different rules for calculating those thresholds,” the GAO said.

To make things simpler, a new set of national laws for e-commerce businesses should treat taxpayers fairly across state lines, strive for efficiency to reduce compliance costs and reduce the number of tax jurisdictions that businesses need to worry about when tallying sales, GAO said.

“While the right of states to levy taxes, and to empower their localities to do the same, is a well-founded principle of state sovereignty, under the Constitution’s Commerce Clause, Congress has the authority to regulate interstate commerce,” GAO’s report found.