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Countdown to New State Sales Tax on Online Shopping

The big holiday retail season is almost upon us. Likewise, a new state tax on online sales that’s expected to bring New Jersey hundreds of millions of dollars in revenue

Online shopping
Credit: Creative Commons

New Jersey has a new tax law on the books that will soon require most e-commerce websites to collect sales taxes — and send the revenue to Trenton — whenever they sell products to Garden State residents.

The new tax policy goes into effect next month, just in time for the start of this year’s holiday shopping season.

Signed into law by Gov. Phil Murphy last week, the policy change comes several months after a major U.S. Supreme Court ruling made it clear that states have a right to require that companies collect sales taxes in the states where they are selling products online even if they don’t have a physical presence there.

New Jersey’s new law will require online retailers and marketplaces like eBay to begin collecting sales taxes and turning the revenue over to the state if they have gross revenues over $100,000 a year in New Jersey, or if their in-state sales volume exceeds more than 200 transactions annually.

Lawmakers have portrayed the levying of online sales taxes as an issue of fairness for the state’s brick-and-mortar retailers, putting them on a more equal footing with online companies. The new policy, which takes effect on November 1, could also juice up revenue collections for the cash-starved state; initial estimates predict nearly $200 million or more could be collected during the current fiscal year.

In olden days, before the internet

ecommerce

Relevant legal precedents related to what are known as “remote sales” date back to a time when most purchases that were not made in-person were completed using catalogs or print advertisements. In those cases, courts determined it was too onerous to make out-of-state companies track and collect sales taxes for every state where residents were buying their products. After the internet was invented and e-commerce grew into a major industry, websites and online marketplaces continued to skirt the sales-tax laws as residents were instead supposed to keep track and pay their states any sales-tax obligations on their own.

But in a decision issued by the U.S. Supreme Court in June, the justices upheld a South Dakota law that established a sales tax for online purchases made by that state’s residents. In their decision, the justices suggested the online sales have created a tax shelter that disadvantages in-state brick-and-mortar businesses selling the same products. They also noted technological advances and tax software make it much easier to track and process state sales-tax rates.

The court decision came down just days before New Jersey’s deadline for a new budget, and lawmakers rushed to pass a measure resembling South Dakota’s. Murphy conditionally vetoed the measure, after which lawmakers redrafted it, and it eventually made it back to the governor’s desk late last month. He signed the bill into law late last week, meaning it will be in place for Black Friday and Cyber Monday, two of the year’s busiest days for e-commerce.

A notice issued recently by the state Division of Taxation defines a remote seller that will be subject to the new law as “a business that sells products online or by mail order or telephone to a customer located in a state in which the seller has no physical presence.” That means it applies to companies that sell their own products online, but also those like eBay that create an online marketplace for buyers and sellers. Amazon falls under both categories since it sells its own products and also operates a product marketplace. But Amazon’s own products have already been subject to the state sales tax since 2013, thanks to a policy enacted during the tenure of former Gov. Chris Christie.

Exemption for travel agencies

The new tax law requires the same 6.625 percent sales-tax rate that is currently levied on in-person purchases in New Jersey to also be applied to the remote sales. But it provides an exemption for travel agencies, including those that arrange accommodations online.

Paul Moriarty
Assemblyman Paul Moriarty (D-Camden) says everyone should play by the same rules.

Although it took lawmakers awhile to get on the same page with Murphy, the tax-policy change still has the potential to generate a sizable portion of new revenue for the state budget during the 2019 fiscal year. Lawmakers assumed the remote sales tax would eventually be adopted, and an official revenue estimate of $188 million was included in the state budget that Murphy signed into law in early July. Other, more optimistic projections suggest as much as $350 million could be generated by the time the fiscal year closes next June.

After Murphy’s recent decision to sign the bill, sponsors suggested the policy change should benefit state-based businesses — which hire New Jersey residents and pay local taxes on their properties — whereas the online companies have no real ties to the state.

“The fact that they are not physically located in New Jersey should not exempt a business from sales tax and use requirements,” said Assemblyman Paul Moriarty (D-Camden). “These businesses should play by the same rules as other New Jersey businesses who pay property taxes, local taxes and make an investment in the communities they're in.”

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