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 ...
- Are the Main Street bills simple enough? Why or why not?
- 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:
- With Sales Tax Software, Are Sales Tax Discounts Still Appropriate?
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017
- Would Broader Sales Tax Base Deliver Simplification - and Savings?
- Trailing Nexus - When Does It End?