A Minnesota Tax Court judge has affirmed the state’s right to collect use taxes from companies that buy goods and services online from out-of-state businesses.
The decision is part of a larger puzzle involving online sales tax and each state’s ability to enforce it on purchases in other states. The use tax exists because current law doesn’t allow states to force out-of-state sellers to collect tax on sales in Minnesota unless the seller has a physical presence in the state.
As more and more companies buy goods and services on the Internet from out-of-state businesses, the Department of Revenue has tripled its staff devoted to auditing companies not complying with the use tax, said Aaron Hall, an attorney in Minneapolis who advises clients on tax questions.
“If a person is not paying sales tax to buy something, then the state is going to recover that money under the guise of the use tax,” Hall said. “Obviously they can’t charge sales tax on transactions out of state, but they do have authority over people who use stuff in Minnesota.”
The latest case arose after Employment Solutions Staffing Group, based in Edina, was audited in 2012. The firm argued in court that the use tax is unconstitutional and asked for a permanent injunction against the Department of Revenue collecting the tax.
But Judge Joanne Turner ruled that Employer Solutions must pay $2,927 in unpaid use taxes from 2008 to 2011 to the Revenue Department.
Turner ruled on Oct. 22 that the U.S. Supreme Court has repeatedly affirmed the right of states to collect use taxes, that there was no reason to stop the state from collecting the use tax, and that the staffing agency’s argument was a “frontal attack on the Supreme Court’s Commerce Clause jurisprudence.”
Rebecca Levine, a lawyer for Employer Solutions Staffing Group, said the company pursued the case because it feels the law is incorrect.
“We feel that it’s a violation of interstate commerce,” said Levine, of the firm Thiel, Campbell, Gunderson, Anderson and Levine. “Obviously the judge didn’t agree with us.”
Like sales taxes
Use taxes are just like sales taxes, except they are levied against the buyer when no sales tax applies to a purchase. In Minnesota, the tax applies to purchases by businesses and consumers, though the state has not been able to enforce it for out-of-state purchases by individual consumers.
Hall said the Department of Revenue is doing some education on the issue, but many companies don’t know about the use tax and compliance is spotty.
“Right now, this is a hot area,” he said. “Every company who buys online should be filing a use tax return at the end of the year. If you’re an egregious violator, like a company of a substantial size, you make yourself a target for the Department of Revenue.”
Seeks voluntary compliance
Department of Revenue spokesman Ryan Brown said in an e-mail that “previous compliance studies suggested that paying use tax is a difficult issue for both businesses and individuals,” but state tax collectors work to encourage voluntary compliance.
Were Congress to pass a measure known as the Marketplace Fairness Act, which would allow states to force all retailers to collect sales tax regardless of whether they have a physical presence in a state, the whole disagreement would be rendered moot.
“That would solve it,” Levine said.