Question

1. State Sales Tax is a complex area due to the enormous volume of taxing jurisdictions, each with different definitions, tax rates and exemptions. Would it make more practical sense to have a Federal Sales Tax (with all associated revenues allocated to the States) and eliminate the complexity at the state level? Do you think States would be in favor of a Federal Sales Tax to replace State and Local Sales taxes?

2. In the aftermath of the Wayfair decision, some taxpayers are concerned that Physical Presence may no longer be required for Income Tax Nexus. Is this concern justified?

Answer 1

(1): Yes, it would certainly make more practical sense to have a Federal Sales Tax. This is because having a Federal Sales Tax will lead to having a single and uniform rule and law with regards to sales tax throughout the country and this will do away with the problems and complexities that arise due to the different tax rates and different tax rules and regulations of each state. A federal sales tax will simplify the entire structure and people and entities will not have to spend considerable amount of time with regards to sales tax compliance, payments and filings.

States will not be too much in favor of a Federal Sales Tax that will replace State and Local taxes because the states might fear that they will lose hold on the revenues or the cash inflows that accrue to them through the state sales tax and local sales tax. In fact States will be apprehensive of losing hold and autonomy over their tax revenues which forms a sizeable chunk of their overall budgetary receipts.

(2): No, this concern is not justified. This is because in today’s world the physical presence requirement does not hold much ground given the rapidly changing business models and operational models. Physical presence is not required to meet the “substantial nexus” requirement. Substantial nexus can be established through extensive virtual presence as well. It should be noted that the law, through the Wayfair decision, has not provided states carte blanche to enact or enforce all forms of economic nexus laws and so there is no need for concern here as well.