The Internet sales tax bill that was recently passed by the Senate includes a provision that would allow tribal governments to require online retailers to collect sales tax on sales to residents of the tribe’s reservation. The same bill would require businesses on Indian reservations to collect tax on sales delivered to customers outside of the reservation.
The bill still needs to pass in the House before the tribes may begin to require online retailers to collect sales taxes and it faces significant political opposition. Tribal governments that impose a sales tax should prepare to meet the requirements of the bill if they want online retailers to collect their tax.
In addition, businesses based on an Indian reservation should also prepare for the possibility that they will need to collect sales tax on deliveries to its customers.
Under the 1992 Supreme Court case Quill Corp. v. North Dakota, a state cannot require a retailer to collect its sales tax unless the retailer has a substantial physical presence in the state and the same limitations apply to the tribes. Congress, however, has the authority under the interstate commerce power to require retailers to collect state and tribal taxes. For more than a decade, bills have been introduced for this purpose in every congress, but until this year, none of these bills have ever made it out of the committee.
The Marketplace Fairness Act, like its predecessors, faces strong political opposition. These bills have always had the support of governments (who are losing tax revenue), traditional brick and mortar retailers (who have been losing sales to online retailers), and commercial real estate interests (who are losing lease revenue as sales by brick and mortar retailers are effected by online sales). But they also faced strong opposition from businesses that conduct Internet sales (who do not want to pay taxes) and groups that oppose taxes. This political calculus changed last year when Amazon switched sides and joined the calls for a uniform system of taxing online sales. It remains to be seen, however, whether this alliance is strong enough to force the bill through the House.
As originally written, the bill authorized state and local governments to collect sales taxes but did not apply to tribal government. A last minute amendment changed the definition of the word “state” so that it includes “any tribal organization (as defined in section four of the Indian Self‐Determination and Education Assistance Act (25 U.S.C. 450b)),” allowing tribes to also take advantage of these provisions. This amendment may also come under political attack in the House because many businesses are unfamiliar with tribal taxation systems and may be concerned that it will be difficult to identify which sales are subject to tribal taxation and manage several hundred additional sales tax systems.
If the bill is eventually passed by the House, tribes that wish to collect this tax will need to comply with several technical provisions to collect sales or use taxes on Internet purchases. To collect the tax the tribal government would need to compile and maintain a list of taxable and nontaxable items, and provide this information on “the taxability of products and services along with any product and service exemptions from sales and use tax.” A single tax authority would need to be set up, if it does not already exist, with a single audit process and a single tax return per business for all Internet sales. The tribe would also need to provide software, free of charge, which would calculate this tax and prepare tax returns and then ensure that this software is updated whenever the tax laws change. Since the process of complying with these requirements might take some time, tribal governments who wish to have online retailers collect their tax should begin preparing in the event that this bill becomes law.
On the other hand, online businesses located on Indian reservations will also need to deal with this bill. Should it become law, a business with more than $1 million in total sales that delivers merchandise from a reservation to customers off the reservation will also need to begin collecting sales tax imposed by the state where the merchandise is being delivered. This means such reservation‐based business will need to integrate software into their business systems to calculate the tax and file returns.
Once again, the Marketplace Fairness Act still has a long way to go before becoming law, but tribal governments that impose a sales tax and online businesses based on Indian reservations should begin preparing for the eventuality of this bill becoming law.