Top Concerns with Rep. Chaffetz’s Online Sales Tax Bill

Legislation should not create problems, it should enable solutions.
But, Representative Chaffetz’s online sales tax bill creates big problems for U.S. consumers, businesses and state governments.

Like most sequels, the new release of the Marketplace Fairness Act (MFA) is even worse than the original. A bill that claims to focus on collecting more online sales taxes with less burden on small businesses actually accomplishes none of its goals.  Small businesses will see a greater percentage of their sales go to the management of a bureaucratic tax collection process and consumers will see up to eight percent of their taxes go to certified software providers – the only true winners in MFA: The Sequel.  

  • Requires businesses to track rates and rules in over 10,000 jurisdictions.

    Just like MFA, the Chaffetz bill lets all 10,000 local tax jurisdictions impose unique rates, tax holidays, thresholds, and caps. Each of the 46 states can still have its own definition for taxable products and services and a unique definition for key terms like “sales price.” And each state can require its own filing form and payment mechanism. This is hardly simplification.

  • Businesses will pay to integrate any ‘free software.’

    Certified Software Providers (CSPs) will install their software, but aren’t required to pay for modifications and testing of a seller’s customized ordering and fulfillment systems. Moreover, CSPs can charge sellers for access and services attributable to states where the seller has any physical presence.   This software is “free” like a found puppy is free to its new owner – it comes with a lifetime of costs. TruST estimated that a middle-market online retailer would spend several hundred thousand dollars on setup and maintenance over the first 5 years.

  • Empowers 46 state tax administrators to audit any business anywhere.

    MFA gives each state the power to audit or demand payment from any business in any state. The Chaffetz bill gives only illusory protection from state audit risks: Any business with over $5 million in annual sales gets no audit protection whatsoever. For smaller businesses, Certified Solution Providers will answer audit questions, but the business is still liable if they made any mistakes in categorizing their products among the taxability schemes of 46 different states.

  • No protection for America’s small businesses.

    Chaffetz gives a few years of phase-in for the very smallest businesses, but there’s no mercy for anyone using an electronic marketplace for any of their sales. This means any business has to immediately pay for modifications to their ordering and fulfillment systems — just because they get some of their customers from Amazon marketplace. Worse, even hobbyists and collectors are liable for sales tax on every sale if they use eBay to find a single customer for a rare Beanie Baby.

  • Ignores the lessons learned in Europe.

    The EU learned a valuable lesson from a decade of forcing remote sellers to file Value Added Tax (VAT) wherever the customer resides, finding significant VAT burdens when selling across borders among 28 member states.   They found that European consumers would save over $13 billion each year “if they could choose from a full range of EU goods and services when shopping online.”

    The EU’s new Digital Single Market proposal turns away from the MFA approach and is consistent with Chairman Goodlatte’s approach: “Instead of having to declare and pay VAT to each individual Member State where their customers are based, businesses would be able to make a single declaration and payment in their own Member State.”

  • Taxpayers are forced into state court to challenge a state tax collector.

    Even when challenging a state’s compliance with the Chaffetz bill, tax-paying businesses are forced to bring the case in state courts in the state they are challenging. This will be far from impartial in many state courts, so challenges over a federal law should allow taxpayers to be heard in federal courts.

  • Allows states to expand nexus and impose tax obligations on remote sellers.

    Neither MFA nor Chaffetz’s bill prevent states from expanding their patchwork of laws imposing tax obligations on businesses with no physical presence in their state. States can still legislate that commission payments create nexus, or that every business has to file ‘tattletale’ reports on remote purchasers.

  • Moving Money From Citizen’s Pockets to Private Companies

    A half-dozen companies that stand to profit by serving as a clearinghouse for tax collections. It’s no wonder these CSPs have pushed for this legislation: one estimates they will rake-in over a billion dollars by extracting 5 to 8 percent of the taxes they process.