Experts Present Alternative Internet Sales Tax Solutions

The Bond Buyer By Naomi Jagoda March 12, 2014

WASHINGTON — A panel of experts on Wednesday presented the House Judiciary Committee with approaches that Congress could take with Internet sales tax legislation.

The options — which include either having remote purchases taxed under the rules of the state where the retailer is located or requiring remote sellers to provide sales information to customers and states — were alternatives to the Marketplace Fairness Act approved by the Senate last year.

House Judiciary Committee chairman Rep. Bob Goodlatte, R-Va., has problems with that measure and pointed out the benefits of one of the alternatives presented.

State and local governments and many businesses have been urging Congress to pass legislation that would resolve the problems caused by the fact that currently, states cannot require businesses that lack a physical presence in their borders to collect their sales taxes. Technically, customers in the 45 states that collect sales taxes have to pay taxes on online purchases even when they are not collected by the retailer, but in reality this requirement tends to be ignored and not enforced, Goodlatte said.

Sales taxes account for over one-third of revenues for most states including over half of the tax revenues in six states, according to data cited by the steering committee co-chairs of the National Conference of State Legislatures.

The Marketplace Fairness Act, approved by the Senate last May would allow states to compel remote sellers to collect sales tax if the states simplify their sales tax laws. But Goodlatte had issues with the bill, and it stalled in the House. Goodlatte said that some of the defects with the MFA are that the public views it as Congress taxing the Internet and that compliance with collecting the taxes is not “sufficiently simple.”

In September, Goodlatte called for seven principles for Internet sales tax legislation: tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights and privacy rights. The witnesses explained different methods that would address the Internet sales tax issue while following Goodlatte’s principles.

One option was most similar to the MFA. That approach, proposed by Joseph Crosby, a principal at MultiState Associates Inc., would be for Congress to allow states to require remote sellers to collect taxes if the states simply the administration of the tax. Congress could create a framework for streamlining that only applied to remote sellers and remote sales, which would allow states to keep full autonomy over sales within their state but would keep the sales tax collection burden on remote sellers low.

Andrew Moylan, senior fellow and outreach director at the R Street Institute presented another option called “origin sourcing.” Under this approach, internet purchases would be taxed under the rules of the physical location of the seller but would not be distributed back to the state of the purchaser.

Christopher Cox, a former congressman and chairman of the Securities and Exchange Commission who is now a tax policy advisor to NetChoice, presented an option based on the idea of “home rule and revenue return.” Similar to origin sourcing, this approach would permit businesses in states that are part of a compact to apply the tax rules of the state where the business is located, rather than those of the state where the customer resides. But unlike origin sourcing, the taxes received from out-of-state purchases would be distributed to the customers’ home states.

Several members of Congress appeared to be critical of the proposals that would tax internet purchases using the laws of retailers’ home states. They were worried that it would lead to a “race to the bottom,” in which retailers would relocate, or game the system, so that they could apply the rules of states like Montana in New Hampshire that do not have sales taxes.

Moylan said that any origin sourcing legislation should establish rules to prevent businesses from gaming the system.

Goodlatte appeared to show interest in the “home rule and revenue return” proposal. The chairman noted that some of the proposals seemed to suffer from privacy concerns while others suffered from having high compliance burdens. He asked Cox if was fair to say that his proposal avoided both of those problems. Cox responded that it was.

Another witness, William Moschella, a shareholder at a firm which represents the owner of the Simon Malls, supports the MFA approved by the Senate but also proposed that Congress pass a law prohibiting the shipment of goods in violation of the sales tax laws of the state to which the goods were shipped. Congress could also allow states to seek injunctive relief if the shipment prohibition was violated, he said.

Additionally, James Sutton Jr., a partner at Moffa, Gainor & Sutton, P.A., presented an option for a consumer private reporting system. Congress could pass legislation that would require remote sellers to provide sales information to states and purchasers so that self-reporting of taxes becomes more commonplace. The top Democrat on the Judiciary committee, Rep. John Conyers of Michigan, and another senior Democrat on the committee, Jerrold Nadler of New York, said that they are open to hearing the alternative proposals, but support the MFA and want the committee to hold a hearing on that legislation.

Conyers said he hopes Internet sales tax legislation will be passed by the end of the year.

“We should not delay any further,” he said.