I recently wrote on a failed Colorado law for online sales tax reporting. It generated many more inquiries than I anticipated. Therefore, I am writing this article as a follow up to more thoroughly explain a federal alternative for online sales tax reporting.
On March 12, 2014, the United States House of Representatives Committee on the Judiciary held a full committee hearing on sales tax. The hearing centered on the Marketplace Fairness Act of 2013. Under the new Act online retailers that have sales over a certain threshold would be required to charge, collect, and remit tax in the jurisdiction to which they sell. The Act can also be viewed as a response to the Supreme Court’s challenge in 1992 for Congress to act on the issue of sales tax nexus throughout the country.
The six person panel brought a number of endorsements and criticisms to the Act. Proponents of the bill believe the Act simplifies sales tax on a national level. They point to software that will enable companies to accurately report sales to the some 9,600 state and local jurisdictions. Supporters of the bill believe this sales tax simplification will put online retailers on the same footing as brick-and-mortar retailers that have to charge, collect, and remit sales tax. While in theory it may sound simple and fair, the bill’s endorsers failed to take into account the myriad of problems that come with giving states jurisdiction over companies outside their borders. For example, small and medium online retailers potentially face audits, collections, and criminal sales tax issues for 45 states and thousands of localities.
Another interesting idea was brought to light by former Congressman Christopher Cox. Cox outlines a plan that suggested a form of origin based sales tax collection. In essence this means that sellers would charge based on where the sellers were located and not where the traditional purchaser resides. Again, in theory, the application seems simple – a company would only have to comply with local sales tax rules and obligations. The practical problem, however, is that companies could easily plan around such a law and move to states in which no or little sales tax exists. Some commentators believe such a drastic overhaul of traditional sales tax principles was an attempt to indirectly endorse the Marketplace Fairness Act.
Although, not as publicized as the other ideas, another interesting and somewhat novel concept was brought to light – consumer private reporting (“CPR”). The CPR system is intended to require remote sellers to report remote taxable sales, provide the purchasers with reports to enhance compliance, attempt to put remote sellers on the level playing field with the brick-and-mortars, and preserve state sovereignty with state tax compliance. In short, the CPR system is designed to require sellers to report or have a third party software company report all of its taxable sales into a new, national database. The information provided would be only taxable gross sales, by purchaser, by state without any details of what was purchased from whom. The national database would provide something similar to a 1099 to the states and purchasers with a report of gross taxable sales made into that state by that purchaser. The customer would then have the information to file its use tax return as it is already required to do and the state could chose to enforce the use tax requirement or not.
Critics of the CPR seem to focus on perceived privacy issues. Specifically, critics fear that states will have detailed information of individual customer purchases. However, the fears are based on the misunderstanding of how the CPR system keeps all details of what was purchased from whom with the remote vendor. Neither the national database nor the states get any information on what was actually purchased or the name of the remote vendor. If implemented properly, the privacy concerns under the CPR system are actually less than the Marketplace Fairness Act, which allows auditors to review individual purchase invoices. The CPR, as proposed, will only require reporting of the name of the purchaser and the taxable amount purchased with no details of what was purchased or from whom. It will not require that the purchaser’s specific purchase be documented. Therefore, the notion that the CPR will create privacy issues is a fallacy.
Despite its minor criticisms, the CPR system seems to be the most workable alternative. It escapes the problems companies would face under the MFA, and most importantly does not give the states jurisdiction over remote sellers. In other words, the commerce clause would remain intact. Further, states would remain autonomous as to what extent to enforce their laws and it gives them a much better chance of collecting the ever elusive use tax. It is surprising this alternative has not generated more traction and it seems like the most attractive in my view.
One thing is apparent from the recent congressional hearing, the sales and use tax system in this country is struggling and it needs help. Only the federal government has the power to legislate in a way that can assist, but it must do so in a way that interferes with interstate commerce the least. I support the Consumer Private Reporting system and believe that solution. It takes sales and use tax out of the competitive equation between brick/mortar vendors and remote sellers. It also allows the state to realize the dream of regular and systematic use tax reporting by its own citizens. However, the proposed Consumer Private Reporting legislation does so in a way that puts the least burden on remote sellers and interstate commerce. It will be interesting to see if others agree in the coming months.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?
- Does Nexus Trail a Company After Leaving a Jurisdiction?
- Nexus Update: Washington Enacts New Nexus Standards
- New Proposed Nexus Legislation – Not Very Helpful