Mississippi could be the third state to challenge a landmark U.S. Supreme Court decision that prevents states from requiring online retailers to collect state sales tax.
Ashley May, the general counsel for the Mississippi Department of Revenue, said Wednesday that DOR Commissioner Herb Frierson was “aware” that a proposed internet sales tax would likely draw a legal challenge. Her comments were at an oral proceeding about a proposed DOR rule that could establish an internet sales tax.
The oral proceeding was to hear comments from stakeholders before the DOR approves of a final rule. No timetable was announced on when a final rule could be promulgated.
According to the 1992 U.S. Supreme Court decision Quill Corp. v. North Dakota, retailers are required to have a physical presence in a state before it can levy sales taxes on them. The proposed rule would challenge that precedent, as it would require firms with $250,000 in annual sales to register with the DOR and charge Mississippi customers the state’s 7 percent sales tax.
Right now, taxpayers are supposed to pay a 7 percent “consumer use tax” individually on all purchases from out of state firms.
Alabama, in 2015, and South Dakota, in 2016, mounted challenges to the Quill decision’s key concept of a physical nexus such as a store or warehouse as a requirement for a state to be able to mandate the collection of sales tax.
That means a company that sells online in Mississippi and has stores there, such as Walmart, has to collect sales tax, whereas a purely online retailer with no stores or warehouses located in the Magnolia State does not.
The rule uses the concept that a firm’s customers, by using the internet to buy goods, become the nexus, thus requiring it to collect tax. Under the proposed rule, May says the DOR could audit any out-of-state company in the United States if it believes that it reaches the $250,000 annual sales threshold, a standard the agency calls “a substantial economic presence.”
Another component of the rule is the DOR would have the ability to assess out of state sellers — who haven’t voluntarily registered to collect sales tax on Mississippi sales — retroactively with no statute of limitations.
The proposed DOR rule isn’t the only means by which Mississippi could start taxing internet sales. There’s also House Bill 480 — which was passed by the House and is in the hands of the Mississippi Senate — that would impose a similar tax.
Stephanie Rogers, the DOR’s director of tax policy, said that the DOR’s efforts and those of the Legislature “were not synced together” even though the language in the bill and the proposed rule closely mirror one another.
In fiscal 2016, the state collected more than $3 billion in sales tax revenue while collecting a bit more than $310 million in use tax, with only $250,000 of that coming from individual consumers.
Using the methodology used in an 2009 University of Tennessee study, the DOR says that an internet sales tax could add $100 million to $150 million to the state’s coffers.