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Is Mainstreet Fairness Legislation Simple Enough?

author photo of Annette Nellen

Complexity was the key reason why the US Supreme Court held in 1992 that allowing any state to require remote vendors to collect sales tax would violate the commerce clause. In footnote 6 of the Quill decision, the Court stated:

"North Dakota's use tax illustrates well how a state tax might unduly burden interstate commerce. On its face, North Dakota law imposes a collection duty on every vendor who advertises in the State three times in a single year. Thus, absent the Bellas Hess rule, a publisher who included a subscription card in three issues of its magazine, a vendor whose radio advertisements were heard in North Dakota on three occasions, and a corporation whose telephone sales force made three calls into the State, all would be subject to the collection duty. What is more significant, similar obligations might be imposed by the Nation's 6,000 plus taxing jurisdictions. See National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753, 759-760 (1967) (noting that the "many variations in rates of tax, in allowable exemptions, and in administrative and record keeping requirements could entangle [a mail order house] in a virtual welter of complicated obligations") [emphasis added]

The Court told North Dakota it was wrong and reminded Congress that it was within their power to resolve the matter. Thus, Congress can determine what level of "complicated obligations" is tolerable.

Several states have tried to address the "virtual welter" with the Streamlined Sales & Use Tax Agreement (SSUTA). While that is better than each state having its own definitions and administrative procedures, is it simple enough? Consider:

  • SSUTA does not call for one rate per state.
  • SSUTA has been modified several times since initially approved.
  • While each state's taxability matrix helps sellers know what is taxable and what is exempt, the differences and number of states involved makes for a challenging programming exercise

At a 7/24/12 House Judiciary Committee hearing on H.R. 3179, the Marketplace Equity Act, the question of how to define "small" for a de minimis exception came up again (for an interesting prior discussion on this issue see the committee's 11/30/11 hearing (see my earlier discussion and commentary - here). H.R. 3179 provides that sellers with $1 million or less of U.S. sales or $100,000 or less in a state are exempt from collection (unless they have a physical presence). In contrast, S. 1832, the Marketplace Fairness Act, has a $500,000 de minimis threshold, and H.R. 2701, the Main Street Fairness Act, lets the SSUTA define de minimis.

Query - Is the fact that there is even discussion on the size of the de minimus rule mean that the system it is part of is too complex? After all, if collecting sales tax from all of your customers were as simple as any other business practice, why would any business need to be exempted?

Overstock.com executives have an op ed in the Wall Street Journal (7/23/12) on some of the complexity concerns they see with the Main Street proposals.

When I analyze current rules and proposals from a policy perspective, I like to see if they meet principles of good tax policy and address today's ways of living and doing business.  Too often, we get stuck in old ways of how things are done and don't consider how technology can move the system to a newer and better model.  I think this entire sales tax collection topic is one that can be simplified for all stakeholders - businesses, customers and states.

My proposal - State Responsibility Model: Create a system whereby every time a customer pays for goods or services, the vendor gets their money and the state charges the customer for sales tax.  Businesses would no longer have filing obligations, although they could be audited with the state checking that their system is working correctly. Customers don't have to deal with use tax payments. States get their money right away and they bear the costs of the software and the credit card or Paypal fees that are charged.

Congress would still need to mandate that states have common definitions and rules for how law or rate changes could be made effective. States would need to keep their software up to date so that it would know that for a product code and a particular state whether sales tax should be charged. For purchase of taxable digital goods, the customer's address would be the default for determining sales tax.

So, what do you think ...

  1. Are the Main Street bills simple enough? Why or why not?
  2. Is an entirely different system - the State Responsibility Model, described above, a better approach?

Note: there are a lot more possible questions which I'll save for a later time or one of my fellow sales tax bloggers might pursue.  For example, if a de minimus threshold is $1 million, will the legislation collect enough?  Consider that Amazon will start collecting soon in some big states (CA and TX).  Another question - how many Main Street sellers will also have broadened collection obligations because they exceed the de minimis threshold and also sell online? (The Main Street bills are typically described as affecting purely Internet vendors, but they would reach all types of vendors above the de minimis threshold.)

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

9 Responses to Is Mainstreet Fairness Legislation Simple Enough?

  • Posted by Ron on August 28, 2012 1:57am:

    Annette,
    Your State Model IS a better approach with some modifications. A Simple Model can result is the same revenue with less opportunity for fraud, mistakes and improper application of the law. Nothing is perfect but if the revenue is collected then 'job well done'.
    I'm owned a service business for 20 years in TN. I'm currently going through a Sale Tax Audit. My research has revealed a 'Circus' of interwoven, overlapping and vague rules that can and are twisted to suit the purpose.

  • Posted by David on August 3, 2012 5:00pm:

    I don't see any justification for allowing firms to gain a competitive advantage by not collecting sales tax.
    However, it can really be time consuming to process returns with local sales tax. And, how is a small business suppposed to collect the local sales taxes. Suppose, a company regularly makes sales of $200 but has total sales of $5,000,000. It's not really feasible to have the local sales tax rates in the system (how many are there in Texas anyway.)? So are you going to require the business to manually look up local sales tax rates each time they make a sale.
    I think the local sales taxes should not be part of any legislation because it just will impose too much of a burden on businesses.

    • Posted by Author photo of Annette NellenAnnette Nellen on August 3, 2012 11:32pm:

      I think one rate per state is a good idea for simplicity.

  • Posted by Jim on July 27, 2012 11:41pm:

    I don’t see the simplicity with a two transaction approach. Wouldn’t the vendor still be the one collecting the states money from the customer? If so, there would still be a need to account to the state for the sales tax collected. If your suggesting that the state bill the customers directly, wouldn’t that require the vendor to collect every customers identification information and report it to the state?

    • Posted by Author photo of Annette NellenAnnette Nellen on July 28, 2012 12:50am:

      Thanks for the comment. The state would collect from the customer. Just as today, the state doesn't know who the customers are, they don't need to under this system either. The only things that would need periodic checking is whether the system is working - the vendor has labeled its items held for sale correctly (for example, a blanket isn't mislabeled as non-taxable food) and has the proper links in its billing system that enables the customer's state to bill for the sales tax at the same time.
      If the customer's credit card is not valid, the system will catch it. Ever notice that happening to you if you type in your credit card number incorrectly?
      If the customer returns the goods, the transaction should be run through the system again so the state can credit the sales tax back to the customer's credit card.
      This could also be run through a middleman to add another layer of separation between the customer's name and where they spend their money, and the state, for privacy concerns.

      • Posted by Jason on July 31, 2012 10:04am:

        Who maintains the taxability matrix in the registers, the retailer or the state? If the retailer has to keep up with what's taxable or not in every state, I don't see the simplicity in this solution.
        How do you propose to handle cash sales (or echecks or ebt for that matter)? Would the vendors collect cash from the customer and send it to the state (much like they do now)? Or are you talking about having two systems, one for "brick and mortar" stores dealing in cash and one for electronic retailers? That would create all sorts of equal protection questions.
        A truly simple solution would be origin based taxation. Each retailer only has to keep up with the rules in their location, charge tax based on where they are located, and report and remit only to their own state and local taxing agencies. Internet sales would work just like any other retail store, tax based on location of the retailer. This would motivate the states to simplify their tax codes as businesses have the option to leave the state if they don't like the compliance issues (this would be bad for Alabama, Louisiana, Colorado, etc.)!

        • Posted by Author photo of Annette NellenAnnette Nellen on July 31, 2012 10:11am:

          Hi,
          Good questions! Thanks.
          The state should maintain the taxability matrix which may also encourage simplicity. Vendor bar codes should be able to assist the state.
          Cash transactions ... Vendors would be allowed to run the transaction through the software with their business account being charged for the sales tax. For a vendor that only sells taxable items, this should be allowed to be done at the end of the day or week. If we become more of a cashless society, this problem may dwindle. There might be some opportunity for improving reporting of cash, perhaps a discount for using credit or debit cards or Paypal rather than cash. That might also reduce the income tax gap associated with cash businesses.
          Origin based approach would be simple although result in a reduction in collections as there would be many transactions that could be originated from a state without a sales tax.

  • Posted by D'Anne on July 27, 2012 1:22am:

    So you are suggesting that two transactions actually occur with each purchase? One for the vendor and one for the state? Each vendor be required to register with each state anyway in order to facilitate the state collection process. Can you imagine the issues with millions of businesses all with different product/service codes, needing to have that coordinate with the different states' systems? I see a heyday for software programmers here . . .

    • Posted by Author photo of Annette NellenAnnette Nellen on July 27, 2012 5:41am:

      Thanks for the comment. I don't think it will take much work beyond what is already the current situation. Stores usually have their cash registered to apply tax to the non-food items and not to food, assuming that is the law in the state. That designation can be used for the state collection. Congress would likely have to mandate that broader groupings be used to make it easier. But many companies sell tangible goods that are taxable in all states with sales tax.

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