The rise of interstate e-commerce is magnifying long-standing differences in sales-tax laws among various states, forcing retailers with far-flung customers to adhere to 50 sets of nuanced requirements and leaving consumers unaware that they might be paying a higher tax.
Take, for example, a $1,000 TV on sale at Best Buy in Rhode Island. If the TV manufacturer provides a $200 discount, which Best Buy will get reimbursed for due to the lower revenue it will collect from the discounted price, then the buyer pays a 7% sales tax on the original $1,000 price – $70.
If that same buyer bought the TV with the same manufacturer’s discount at a Best Buy in Massachusetts – online or in person – the customer would pay sales tax on the $800 charged at checkout. In Massachusetts, sales tax is based on the final price paid by the consumer, no matter if the retailer gets reimbursed by the manufacturer for offering its coupon or not. In this case, at the Bay State’s 6.25% sales-tax rate, the tax would amount to $50.
Neither policy is new – Rhode Island’s has been on the books at least since 1947, and Massachusetts’ dates back to 1967, according to spokespeople for each state’s Department of Revenue. But it’s a bigger problem now than ever before, according to Craig Johnson, executive director for the Streamlined Sales Tax Governing Board.
The board was created in 2000 with the intent of helping create an agreement to “simplify and modernize” sales and use tax administration among the states. Twenty-four states, including Rhode Island, have signed on. Massachusetts and Connecticut have not.
To Patrick J. Reynolds, a senior tax analyst with the Council on State Taxation, the biggest problem is the burden it creates on businesses – not just national big-box retailers such as Best Buy, but the small businesses reaping e-commerce sales during a still-raging COVID-19 pandemic.
“Retailers are stuck in the middle of this,” Reynolds said of the inconsistent sales-tax policies.
Rhode Island’s policy on taxing items with a manufacturer’s coupon is much more popular, according to Reynolds. Only a “handful” of states follow Massachusetts’ rules.
But the broader issue of how tax codes can vary from state to state remains problematic.
The Streamlined Sales Tax Governing Board offers free services to member states to help them calculate and collect the appropriate sales and use taxes, reducing some of the burden. But the principle of uniformity and simplicity is still an issue, Johnson said.
On the consumer side, lack of awareness may also be a problem. It took three weeks for the R.I. Department of Revenue to fully answer questions from Providence Business News about the specific differences between Rhode Island and Massachusetts state tax policies that cause a consumer to pay a lower sales tax on a discounted item in Massachusetts, although spokesperson Paul Grimaldi attributed the delay in part to the department’s role in overseeing some pandemic-relief grants.
Grimaldi declined to comment on whether there was more the state should do to make consumers aware of differences in state sales-tax policies.
R.I. Rep. Brian Patrick Kennedy, D-Hopkinton, said more education is always better. Even seemingly aware consumers such as himself have been caught off guard.
“I’ve bought things online from the Home Shopping Network and realized later … the sales tax was applied to the item itself and the cost to ship,” he said. “It’s not always clear to consumers when different things are applied. I would hope the Department of Revenue would be as forthcoming as possible with taxpayers.”
In the end, the upfront savings a consumer might see from buying that discounted TV in Massachusetts versus Rhode Island should even out, thanks to a “use tax” charged on items purchased outside of Rhode Island that ultimately will be used in the state. The collection of that tax, however, relies on the consumer reporting the purchase.
Nancy Lavin is a PBN staff writer. You may reach her at [email protected]
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