Steps Virginia Must Take to Tax Internet Sales

Virginia cannot meet new Supreme Court standards for interstate sales tax collection without changing its laws. Source: Tax Foundation

Conformity to recent federal income tax changes is not the only challenge (or opportunity, depending on your point of view) facing the 2019 Virginia General Assembly.  It may also be asked to amend Virginia’s sales and use tax rules, so the tax can be demanded from out-of-state sellers.

A recent review from the Tax Foundation provides concrete advice on the steps Virginia should take to bring its rules in line with recent direction from the U.S. Supreme Court, which reviewed and blessed South Dakota’s approach in the Wayfair decision.  It also points to several states ready to roll or almost in compliance, including North Carolina.  Each state is discussed in the report.

The Wayfair ruling reversed two previous decisions that states could not force businesses with no physical presence inside their border to collect and remit the tax.  The tax advantage for online sales has been fought by traditional retailers for decades.

The first and most difficult recommendation is Virginia should adopt the uniform sales tax definitions and rules of the interstate Streamlined Sales and Use Tax Agreement (SSUTA), a step South Dakota has already taken that played a key role in the majority’s opinion.

Joining SSUTA is something the Virginia legislature has refused to do as recently as 2016.  As part of that, Virginia would need to develop a simple on-line method for retailers in other states to report and remit the taxes they owe to Richmond.

A good description of the challenge is provided in the fiscal impact statement for the failed 2016 bill, which lists several provisions in Virginia that differ from the SSUTA and would have to change.  It also reports that the major hurdle in the past, Virginia local government insistence on applying tax at the point of sale instead of the point of delivery, has been addressed and perhaps removed by SSUTA.  Inside Virginia point of sale could remain the rule.

One option mentioned by the Tax Foundation not previously proposed in Virginia:  Allow remote sellers to register with SSUTA directly and recognize payments to Virginia through that mechanism as compliant with state law.

Secretary of Finance Aubrey Layne has estimated a possible $250 million windfall for the state, which would be split between the state and localities.   One state legislator is already pushing to earmark all the revenue to school construction.

After years of politicians promising to keep the internet “tax free,” moving to expand the tax on remote sales may be resisted by some people. But the internet hasn’t been tax free for some time, with large retailers including Amazon collecting tax and internet service itself subject to a sales tax now in this state – one of the few instances where Virginia taxes a pure service.

Virginia has not adopted SSUTA but has played an advisory role in its development.

Small retailers complain with good reason that it will be impossible to comply with the thousands of sales tax collectors and rule variations around the U.S.  But as the Tax Foundation points out, that is not much of a problem in Virginia.

Despite having 174 tax jurisdictions, “the state provides central collection and local sales taxes must adhere to the state sales tax base.”  Central collection means the Virginia Department of Taxation has authority over sales taxes and conducts any audits, not individual cities and counties.

The Tax Foundation, citing the court rule, also recommended a threshold level of activity before the tax is triggered. In South Dakota’s case that is $100,000 in sales or 200 annual transactions.  That leaves truly small retailers out of the tax collector’s net.

Many of these issues gore somebody’s ox, so a serious effort to adopt the SSUTA definitions should begin well before the Assembly convenes in January.  Without adoption of SSUTA Virginia will likely remain unable to force internet sellers outside its border to impose and remit this tax.  Frankly if it refuses to compromise some of its rules and improve its level of uniformity, sellers shouldn’t have to comply.

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12 responses to “Steps Virginia Must Take to Tax Internet Sales”

  1. LarrytheG Avatar

    Per your continuing quality journalism – congrats and thank you! You keep this up and it’s going to get noticed.. and if BR is not careful – others will want you – also.

    At any rate – a couple of observations.

    1. – A momentous and forward looking decision was made in 2013 with HB 2313 of which Mr. Lane had a role.

    2. – let me extract language from a part of that bill:

    ” The bill establishes procedures for the collection of the state sales and use tax from retail dealers located outside Virginia for sales made into the Commonwealth, contingent upon the federal government passing legislation authorizing such collection. In the event that such revenues are collected, a portion of the revenues will be allocated to localities for education, a portion will be allocated to localities with a stipulation that some of the funds be used by the locality for transportation needs, and a portion of the revenues will be deposited in the Transportation Trust Fund. A portion will also be used to reimburse localities that currently impose a retail sales tax on the sale of certain fuels used for domestic consumption, as the bill also repeals the authority to impose such tax. If the federal government does not pass legislation authorizing the Commonwealth and other states to collect sales taxes from retail dealers located outside the respective state by January 1, 2015, then the motor fuels tax imposed on gasoline will be raised from 3.5% to 5.1% (the motor fuels tax on diesel fuel will remain at 6%, but the diesel fuel refund for passenger cars, pickup or panel trucks, and trucks weighing less than 10,000 pounds will be in an amount equal to a 0.9% tax paid). If the federal government passes such legislation after January 1, 2015, the rate of tax on gasoline will revert to 3.5%.”

    So – now the State is not only becoming the collector of a good percentage of sales taxes but it is ALSO deciding what it will be spent for – as opposed to the locality deciding.’s true, money is fungible – but when the State dedicates collected revenues for specific purposes – at the local level – it basically puts a serious crimp in the “fungibility” – in the case of transportation ……

    stay with me……..

    to this point – many localities do NOT allocate or allocate very little of their car taxes for transportation – and if Mr. Gilmore had actually embedded that in his “rebates” from the state to the locality , it would have been a good thing instead of a bad thing.

    but we move on – and now – The state will collect the sales tax and WILL dedicate at least some of it to Transportation – at the local level (as well as at the State level).

    okay – so we’re not done yet….

    Some folks would say that all that will accomplish is creating a de-facto slush fund for the localities to waste on bad/developer-driven roads… BUT – the very same Mr. Lane also had a big role in a little thing called Smart Scale which strongly incentivizes using data and metrics to prioritize projects.

    Finally – make no mistake -the transition away from per gallon fuel tax to a per purchase sales tax is nearing completion now for BOTH in-state and out-of-state general purchases.

    So.. Virginia, with the help of Mr. Lane and others I’m sure has made the transition to paying for transportation even as cars get better mileage and/or become electric.

    I’m sure there are critics .. but I’m not one. I think they did a good thing – a sustainable/viable funding source – and conversion to metric/merit transportation prioritization.

  2. TooManyTaxes Avatar

    This is not rocket science. Does the Commonwealth want the extra tax revenues? Does it want to put its brick and mortar retailers on the same footing as Internet retailers? Assuming the answers are “yes,” then the state government needs to make changes. If some people object to the changes, ask them questions one and two again.

  3. djrippert Avatar

    I think it’s right to tax internet sales made to Virginians in Virginia. However, I am beginning to wonder what becomes of all these surprise surpluses coming up. Federal tax conformity, the hospital use “non-tax”, the internet sales tax. What will all this newly found money be used to fund? Given the General Assembly’s long history of squandering windfalls like the tobacco indemnification fund maybe the windfalls should just be rebated to the taxpayers in the form of lower Virginia tax rates. Or … shall we reopen the Rt 460 “opportunity”.

    1. Steve Haner Avatar
      Steve Haner

      Ok, I’ve seen it often enough – please spell Sec. Layne’s name with the Y, Larr_. :).

      This is coming about because of a federal court decision, while the transportation bill was tied to a possible Act of Congress. There has been no Act of Congress. So this money will be distributed, if received, just like all existing taxes and has no impact on the fuel tax rates.

      And yes, DJ, that is one of the opportunities of which I speak. The unexpected and un-earmarked revenue gives Virginia an opportunity to tweak things and perhaps reduce some rates, etc.

  4. So, I presume that Amazon does not currently pay tax on Virginia sales. If we’re vying to bring HQ2 to the state, I wonder how Amazon would look upon a decision by the General Assembly to start taxing its sales. Has the company come to peace with the fact that it has enjoyed a huge advantage in the marketplace and that the industry has matured to the point where e-tail and bricks-and-mortar should play on a level playing field, in which case it would not hold it against Virginia for taxing its sales? Or would they consider such a move to be a hostile act?

    I’m not advocating anything one way or another. Just asking.

  5. Steve Haner Avatar
    Steve Haner

    No, it already has major physical presence/nexus in the state so sales by Amazon to Virginia addresses DO have tax added. However that is not the case for many of its third-party sellers. It has been Amazon’s agreement in most states to collect and remit that has changed the field, so to speak, since it now is like the brick-and-mortar and wants everybody else imposing tax, too.

  6. LarrytheG Avatar

    Apart from the internet sales tax issue – Virginia already designates a portion of the general sales tax to transportation and that is going to increase in increments over the next few years. That will apply no matter where the sales tax comes from.. bricks & mortar and then online if that happens.

    But in addition to that there is a difference in the percent tax on gasoline depending on whether online sales are taxed or not (3.5% vs 5.1%. )

    At the end of the day – the result is to allocate (AND collect) taxes for transportation – both at the State level and the local level AND at the same time subject proposals to Smart Scale prioritization. BOTH of these things involved Mr. Layne (with a Y) who now has a larger role in Virginia Fiscal affairs including MedicAid.

    I point these things out in terms of there actually be some intelligent strategy towards fiscal issues for Transportation as well as Health care.

    In other words, some level of responsible fiscal planning – not without differing ideas about priorities but more tuned towards fiscal rather than mindless / directionless ideology and other ignorance…

  7. LarrytheG Avatar

    Not sure if this got referenced:

    Virginia Legislative Issue BriefDeath of a Sales Tax Rule: Wayfair’s Implications for VirginiaNumber 60July2018Connor Garstka, DLS Attorney

  8. Steve Haner Avatar
    Steve Haner

    Also worth a read. So that’s where you got the wrong spelling for the name! The Tax Foundation provides a good road map for how to meet the court’s test of no “undue burden on interstate commerce.”

  9. LarrytheG Avatar

    I think the point worth noting is that Virginia is now funding transportation more and more from sales tax… they actually get more revenues now from the sales tax than gasoline taxes..

    1. That’s a very important point, and one we tend to ignore. The assumption that this is just about sales taxes can lead to wrong conclusions all around.

      Not that it should be this way. We ought to fund transportation through transportation fuel taxes that reflect the amount of use of the transportation system — not sales taxes, imposed on Virginians whether or not they even drive, and without regard for how much. But given the compromises struck to get VDOT funded recently, the fact — the reality — is that sales taxes DO go to fund transportation infrastructure and we should recognize that in adding to the sales tax burden, or subtracting from it.

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