After the US Congress successfully passed the Tax Cuts and Jobs Act, which was signed into law by President Trump in December, the Iowa Legislature will begin work on state tax reform.  One of the major issues that will be discussed is sales tax on e-commerce transactions.

As you have likely read in other blog posts here, the 1992 US Supreme Court decision which established the physical presence standard for the requirement to collect sales tax is being reviewed once again.  This time, the US Supreme Court will be reviewing a case that supports an economic nexus standard rather than a physical nexus standard.

What's driving the potential change?  States including Iowa have reported significant losses in sales tax collections when Iowa citizens purchase products online from out-of-state businesses that lack a physical presence in Iowa.  For Iowa, the dollars are estimated to be between $10 million and $200 million every year.  In these situations, the out-of-state business with no physical presence in Iowa is not required to collect sales tax.  Applying an economic nexus standard would allow states to compel more out-of-state businesses to collect sales tax.

Waiting for the US Supreme Court to overturn their 1992 decision may not be the best strategy for states.  Rather than wait, the Iowa Legislature will begin dealing with this problem when it begins work on state tax reform in 2018.  It's a significant issue that they plan to hit head-on.

Brian Greer

Written by Brian Greer