House Committee Tackles Competing Plans for Collecting Internet Sales Tax

Bloomberg BNA

By Marc Heller March 12, 2014

March 12 (BNA) — The House Judiciary Committee began to sift through ideas on the collection of state sales tax on Internet purchases, appearing to agree only that the issue is more complex than supporters or opponents of the issue have advertised.

At a hearing on Internet sales taxation March 12, witnesses said Congress could consider sales taxes based on a seller’s location rather than the buyer’s, or a system requiring retailers to report sales but not collect the tax, or stick with one aligned with the Marketplace Fairness Act, which lets states require sales tax collection by out-of-state online retailers. Others said Congress should do nothing because any action could be seen as a tax increase.

No idea appeared to emerge as attractive to the majority of lawmakers on the panel, although several lawmakers asked about an “origin sourcing” concept that would impose sales tax based on the location of the online retailer rather than that of the consumer.

Committee Chairman Robert Goodlatte (R-Va.) didn’t say which direction he believes Congress should take, focusing his questioning on taxpayer privacy concerns and states’ ability to audit businesses in other states. He said the Marketplace Fairness Act (H.R. 684; S. 743) has “fundamental defects,” including a persistent public perception that the bill amounts to a tax on the Internet even though the taxes are already owed. The Senate passed its version in 2013 (88 DTR G-3, 5/7/13).

Origin Sourcing 

Under origin sourcing, an online retailer would simply collect sales tax for the jurisdiction in which it is located, eliminating the need to determine which tax rate is correct for the customer’s location. More than 90 percent of business-to-consumer sales made in the U.S. follow that principle because of how state sales tax laws treat in-person sales, said Andrew Moylan, senior fellow and outreach director for the R Street Institute, in prepared testimony.

Origin sourcing would eliminate the need for computer software to calculate taxes across more than 9,600 taxing jurisdictions in the U.S., and it would remain faithful to the U.S. Supreme Court’s direction in Quill v. North Dakota that states may require sales tax collection only by retailers who have a physical presence within their boundaries, unless Congress dictates otherwise.

“Origin sourcing is not at all a new concept,” Moylan said. “In fact, it governs the vast majority of retail sales today.”

Rep. Sheila Jackson Lee (D-Texas) followed up on the idea, saying one open question is whether an origin-based system pushes retailers to establish locations in low-tax or no-tax states just to escape sales tax collection—and what effect that might have on state revenue. Texas already misses out on as much as $800 million a year in uncollected sales tax, she said, part of about $23 billion that the National Governors Association said goes uncollected nationwide.

“It certainly is a very fair system to the extent that it’s logical,” Lee said.

The idea fell flat with Rep. Jason Chaffetz (R-Utah), who is helping to craft new legislation that meets Goodlatte’s goals. If the point of federal action is to create sales tax parity among online and brick-and-mortar retailers, origin sourcing falls short, he said.

“I don’t know how you can get to parity under an origin-based system, ever,” Chaffetz said.

Witness Pans Origin Idea

Origin sourcing raises other concerns, critics said, including determining the online seller’s location. Depending on state law, that might be where its headquarters are, or the point from which an item was shipped, for instance—although an Internet retailer such as Inc. might not know the shipping point at the time of the sale, they said.

Although Moylan said state laws could be written to prevent companies from opening shadow locations in non-taxing jurisdictions, another witness—Stephen P. Kranz, a partner at McDermott Will & Emery LLP—told the committee he was doubtful.

“Great tax lawyers other than myself will help companies figure out how to game an origin system very easily. It’s why no country in the world has adopted one,” Kranz said. “Origin sourcing is dead on arrival. It cannot be considered as an alternative.”

Interstate Compact Floated

Former Rep. Christopher Cox (R-Calif.), presented the committee with an idea from the NetChoice Coalition—opposed to the Marketplace Fairness Act—to enable states to create a multistate compact establishing rules for interstate purchases on which sales taxes aren’t currently being collected.

States in the compact would receive sales tax on purchases their residents make from remote businesses located in other compact states, Cox said.

All of those ideas have positive selling points and shortcomings and raise additional questions, lawmakers said.

“The Committee is sympathetic to the plight of traditional retailers,” Goodlatte said in an opening statement. “It is serious about searching for a solution that the various parties can accept. The issue is just far more complex than it seems at first glance.”

As the Judiciary hearing was under way, Rep. Steve Daines (R-Mont.) held a news conference in the hall outside the hearing room to oppose any congressional action on the issue.

Enabling states to collect sales tax on out-of-state Internet sales amounts to a $23 billion tax increase, and Congress should leave the issue alone, Daines told Bloomberg BNA.