Both the House Judiciary Committee and the Senate Committee on Commerce, Science, and Transportation recently held hearings to discuss and consider potential legislation that would permit states to require remote sellers with no physical presence in a particular state (i.e., Internet sellers) to collect and remit sales or use tax on sales made to in-state residents. On July 24, the House Committee addressed the Marketplace Equity Act of 20111 and on August 1, the Senate Committee addressed the Marketplace Fairness Act of 2011.2 These proposed laws represent two of three separate pieces of federal legislation that have been introduced to authorize states to impose a collection requirement on remote sellers.

House Judiciary Committee Hearing: The Marketplace Equity Act of 2011

On October 13, 2011, bipartisan legislation was introduced in the House that would allow all states (both Streamlined Sales Tax (SST) member states and non-member states) to require remote sellers to collect and remit sales and use tax if the state implements a simplified system for administering remote seller collections.3 The simplified system must include the following minimum requirements:

  • A small seller exception for remote sellers with gross annual receipts in the preceding calendar year from remote sales of items, services and products in the U.S. not exceeding $1 million or in the state not exceeding $100,000;4
  • A state must provide a tax return for use by remote sellers and a single revenue authority within the state with which remote sellers are required to file the return;5
  • For remote sellers, the products and services subject to tax must be identical throughout the state; and
  • Generally, a state would need to require remote sellers to collect sales and use tax under one of three rate structures: (i) a single state-wide blended rate that includes both the state rate and an applicable rate for local jurisdictions, as determined by the state; (ii) the maximum state rate, which is the highest rate at which sellers are required by the state to collect tax, exclusive of local taxes; or (iii) the applicable destination rate, which is the sum of the state rate and any applicable rate for the local jurisdiction into which the sale was made.6

The proposed legislation includes a list of information for remote sellers that must be provided in the state's public notice7 and if it is enacted, states that satisfy the above simplification requirements could begin to collect sales or use tax from remote sellers beginning on the first day of the calendar quarter at least six months after the state publishes its notice.8

Testimony9

At the hearing, seven witnesses representing different organizations and interests addressed the bill currently under consideration in Congress. Prior to the witness testimony, Rep. John Conyers, Jr., D-Mich., Ranking Member of the House Judiciary Committee, endorsed the bill and asked his fellow representatives for their support.

Rep. Steve Womack, R-Ark.

Womack, co-author and sponsor of the bill, began addressing the Committee Chairman and the Members of the Judiciary Committee by explaining that "brick and mortar" retailers are required, by law, to collect sales tax on purchases made in their stores. In contrast, there is no collection requirement for remote online retailers lacking a physical presence in the state. The burden of remitting the tax on purchases falls upon the consumer and not the retailer, and the realistic effect of where the burden falls is "bad for our traditional retailers, bad for cities, counties and states who levy sales taxes, and bad for consumers who are unwittingly exposed to potential tax evasion issues." Retailers with physical locations are "crying out" for a level "playing field" that, pursuant to the U.S. Supreme Court in Quill v. North Dakota,10 only Congress can provide.

According to Womack, customers often visit "brick and mortar" stores to get a first-hand look at items only to ultimately purchase the item online, tax-free, and are not even aware that they then are required to complete a state tax form to remit the appropriate use tax to their home state. Womack contended that the proposed bill, which is based on states' rights, the promotion of free-market competition, and keeping taxes low, would close the loophole. He brushed off any arguments that the bill is "too complicated" by pointing out that there is software that can facilitate remittance for remote sellers and that the states would be required to provide such software to remote sellers. Finally, Womack emphasized that this bill would not create a new tax. Rather, the use tax is an existing tax that is already imposed on consumers.

Rep. Jackie Speier, D-Cal.

Speier, who co-authored and sponsored the bill with Womack, stressed the fact that the bill is a truly bipartisan effort that addresses an issue that only Congress can resolve. She cited statistics showing the drastic increase in online retail sales in recent years and the expectation of a further increase in future years, and maintained that although use taxes have been an existing tax, only 1 percent of consumers actually pay them. The effect of the lack of remittance of use tax is that "brick and mortar" stores are closing, jobs are disappearing, and states, such as California, which is expected to lose more than $1.8 billion in uncollected tax revenues this year alone, are losing.

According to Speier, the bill offers a simple framework for states to opt in and it requires participating states to provide the software and services required to remit the newly collected tax without any cost to the remote sellers. Although the bill is admittedly "not perfect," "it is headed in the right direction" and will resolve this issue for states, at least 30 of which are creating confusion by trying to collect the sales tax owed from online sales themselves via several different approaches.

Bill Haslam, Governor of Tennessee (on behalf of the National Governors Association)

Governor Haslam voiced his support for the bill partly because he did not believe that the bill raised or added new taxes, and because the bill advocates fairness and addresses the problem that businesses selling the same items are being treated unequally. In addition, technological advancements now permit online businesses to "easily" collect taxes that are owed "just like local businesses with cash registers do." Currently, to cover the over 12,000 state and local tax rates, eight different companies can provide the software necessary to implement this bill. Because Internet commerce is on the rise and now represents 16.6 percent of all retail sales and states simultaneously are losing revenue due to their failure to collect tax owed on these transactions, Haslam believed it urgent for Congress to act in support of this bill.

Wayne Harper, Republican State Representative from Utah (on behalf of the Streamlined Sales Tax Governing Board)

Harper, the incoming President of the Streamlined Sales Tax Governing Board, stated that the problem was a 6 to 10 percent government-mandated price difference or disadvantage to "brick and mortar" retailers. There is an incentive for consumers to purchase remotely rather than in stores and as a result, states are not receiving the proper taxes they need to provide services or to cut tax rates. Moreover, as Governor Haslam pointed out, there are at least eight different software companies that can provide fast, easy, accurate and affordable software to assist with the collection process. According to Harper, the bill would not effectuate a tax increase. Rather, the bill would merely authorize a "collection tool." While the bill contains good safeguards, Harper expressed his desire to see additional safeguards that would provide greater security to small retailers.

Hanns Kuttner, Visiting Fellow of the Hudson Institute

Kuttner, a Visiting Fellow of a nonpartisan think tank and public policy research organization that forecasts trends and develops solutions for both governments and businesses, framed his position around the evolution of innovation and technology. He stated that information and tax compliance costs are declining. Therefore, it is now questionable as to whether a collection requirement for remote sellers would constitute an "undue burden" today versus decades ago.

Steve DelBianco, Executive Director of NetChoice

As executive director of a coalition of trade associations, electronic commerce businesses, and online consumers, DelBianco vocalized his opposition to the bill, stressing the inequity in requiring online sellers to collect tax based on destination rates, whereas "brick and mortar" stores only have to collect tax based on the rates applicable to the location of the store. He also noted that the bill would adversely affect senior citizens who commonly make catalog orders by mailing checks. Due to the cost burden of implementing software for collection, remitting sales tax to all 46 states, and handling additional state audits, DelBianco argued that the small business seller exemption threshold should be increased to at least $15 million in annual sales (from the $1 million annual sales threshold). According to DelBianco, the $15 million threshold would allow states to collect 90 percent of the uncollected sales tax on e-retail.

Joseph Henchman, Tax Foundation

Henchman, Vice President of Legal and State Projects and Operations of the Tax Foundation, spoke on the need for Congress to establish uniform nexus standards and protect interstate commerce as the world continues to advance with new technologies and means to conduct business. While he conceded that in most instances, Congress should not get involved in state tax policy (regardless of whether the states implement poor policy decisions), the U.S. Constitution grants the federal government authority over state tax decisions when they threaten to harm the national economy. Henchman stated that the bill's simplification requirements for states that would require remote sellers to collect went much further than previous proposals. However, he believed there was further room for improvement.

Question and Answer Session

Issues highlighted during the question and answer session between the representatives on the House Judiciary Committee and the witnesses included the following:

  • Use of additional revenue by states. Haslam and Harper each stated that enacting this legislation ultimately would support a decrease in tax rates in their states.
  • Software to implement new collection requirements. Henchman and DelBianco were of the opinion that software was not an easy solution to the complexities of sales and use tax issues. Both Henchman and DelBianco noted that software would be costly and harmful to remote businesses that will be forced to collect under the bill. Harper, on the other hand, stated that software has vastly improved in recent years and that as a result, some of the issues retailers had to face in the past are no longer a concern. Meanwhile, Kuttner admitted that there are still some software issues that have yet to be resolved. However, he believed that there would be swift efforts to make software more effective. Harper agreed with Kuttner on this point.
  • New tax versus existing tax. Most of the witnesses, including Haslam, Harper and Kuttner, asserted that the bill does not create a new tax and that it merely asks Congress to authorize a new collection tool for states. Henchman noted that while an existing tax was at issue, the public may view it as a new tax. DelBianco was the sole witness who argued that the bill was the equivalent to a new tax because it would force sellers to pay a tax that is due from consumers who are failing to pay it. Of the representatives who spoke on this issue, Rep. Elton Gallegly, R-Cal., believed the bill dealt with an existing tax whereas Rep. Ted Poe, R-Tex., believed the opposite.
  • Burdens on remote sellers. Haslam mentioned the idea of compensating remote sellers for their additional software costs that would be a consequence of enactment. Henchman and DelBianco emphasized the need for greater simplicity than the current draft of the bill. Henchman suggested the use of a single blended rate in each state.
  • Origin versus destination-based tax rate. Rep. Gallegly and Haslam expressed their concern with origin-based sourcing; in particular, they wondered whether origin-based sourcing would cause Internet retailers to relocate to states that do not impose a sales tax. Henchman responded to this concern by stating that businesses would not necessarily relocate and he pointed out that they have not relocated to states that do not impose income tax. DelBianco supported the use of origin-based sourcing because the rate of the origin is what applied to "brick and mortar" stores; it would be simpler if the rate of origin applied to all businesses, including Internet retailers. Kuttner argued that origin-based sourcing could, in fact, become complex. For example, the origin of the sale could be deemed the point from which the shipment is made or the location of the retailer's headquarters.

Generally, the hearing highlighted widespread acknowledgement of the shortcomings of the bill as currently drafted, yet some agreement among the House and witnesses that the bill is a move in the right direction. Chairman Smith stated that the bill does not ensure enough uniformity and could lead to greater inequality among businesses. For instance, foreign businesses could gain an advantage. Rep. Sheila Jackson Lee, D-Tex., was concerned about the thousands of tax jurisdictions and varying rates and definitions and felt the need for greater simplicity. DelBianco agreed that the bill commanded greater simplicity. Despite the recognition of the room for improvement in the drafting of the bill, Reps. Hank Johnson, D-Georgia; Judy Chu, D-Cal.; Tim Griffin, R-Ark.; Ted Deutch, D-Fla.; and Linda Sanchez, D-Cal., all expressed their support for the bill.

Senate Committee on Commerce, Science and Transportation Hearing: The Marketplace Fairness Act of 2011

On November 9, 2011, the Senate introduced another bill, the Marketplace Fairness Act,11 which would grant all states the authority to enforce existing state and local sales and use tax laws. However, unlike the Marketplace Equity Act, the Marketplace Fairness Act treats member states of the Streamlined Sales and Use Tax Agreement differently from non-member states. Member states will simply be allowed to require remote retailers to collect state and local sales and use taxes on their sales of taxable personal property and services. Non-member states may make the same requirement so long as they adopt a number of minimum simplification requirements:

  1. There must be a single state-level agency to administer all sales and use tax laws, a single audit, and a single return.
  2. There must be a uniform sales and use tax base among the taxing jurisdictions.
  3. The collection of taxes must be based on the destination rate.
  4. The state must: (i) provide software and services to remote sellers and third-party providers to help them identify the destination rate, (ii) provide certification procedures to providers to make the software and services available to remote sellers, and (iii) hold providers harmless for errors or omissions due to information provided by the state.
  5. The state must hold remote sellers using a provider harmless for any errors and omissions made by that provider.
  6. The state must allow for liability relief (including penalties and interest) for incorrect tax collection errors that are due to a remote seller's reliance on information provided by the state.
  7. The state must provide remote sellers and providers with 30 days' notice of a local rate change.

As with the Marketplace Equity Act, there is an exception for "small sellers." Under the current draft of the bill, the exception applies to those "small sellers" with less than $500,000 in annual nationwide remote sales. Such remote sellers cannot be required to collect sales and use taxes.

Testimony

At the hearing, seven witnesses representing different organizations and interests addressed the bill currently under consideration in Congress.

Sen. Michael Enzi, R-Wyoming

Enzi, co-author and sponsor of the bill, advised the Committee that by requiring only retailers with a physical presence in a state to collect sales or use tax, states were taking money from the local communities, and giving out-of-state businesses a competitive advantage. Therefore, Congress must give states an opportunity to address and eliminate this unfairness. The Supreme Court even challenged Congress to do so. Enzi also asserted that the bill does not effectuate a "new tax" and that it deals with the fact that most customers are not aware of their obligation to pay tax on online purchases and states' rights. The bill would allow states to require remote sellers to collect tax in a day and age when the Internet "permeates" our lives.

Sen. Richard Durbin, D-Ill.

Durbin, co-sponsor of the bill, first addressed Senator Ayotte of New Hampshire's articulated concern over the bill's effects on states without a sales or use tax regime. Durbin attempted to clarify that the bill would not impose a sales tax on residents of such states and that online retailers in New Hampshire (or other states without a sales or use tax) already face burdens when attempting to do business in other states. They have to follow the state's laws and requirements. For instance, they may be required to register with the Secretary of State.

Durbin continued by mentioning the small business exemption and his willingness to discuss changes to the threshold amount to determine the "right level" for the exemption. He also reiterated Enzi's sentiment that the bill addressed fairness and did not create a new tax, but merely allowed for the collection of tax that is already owed. He went further to explain that the loss of collection revenue has a $23 billion nationwide impact12 and pointed out that the bill has bipartisan support across the country as well as the support of 240 business and labor organizations.

Sen. Lamar Alexander, R-Tenn.

Alexander, another co-sponsor of the bill, agreed with Enzi and Durbin, stating that the bill is not a new tax and that it only allows each state to make a decision for itself. He also elucidated that the bill is not an Internet tax, reminding the Committee that there is currently a federal moratorium on Internet taxes. Not only is there bipartisan support for the bill, but the Supreme Court, in Quill, had invited Congress to solve the unfairness among retailers. Moreover, to Alexander, collection would be "easy" because software is available that would add the tax to the transaction. He was also of the opinion that many states, including his own, would use the extra revenue generated by the bill to lower tax rates.

Paul Misener, Vice President for Global Public Policy at Amazon.com

Misener informed the Committee that Amazon supported a national framework and Congressional authorization of states' requiring collection of sales tax. The bill protects states' rights and does not require a state to join the Streamlined Agreement in order to require remote sellers to collect. According to Misener, states are awaiting Congressional action, and registered voters, in a recent national survey, expressed their support for the legislation as well. Furthermore, the bill would not create a significant administrative burden on remote sellers because of the sales tax collection services that are available to sellers today.

Steven Bercu, CEO and Co-owner of BookPeople in Austin, Texas

As CEO and co-owner of a "brick and mortar" bookstore in Texas, Bercu employs about 100 people and also sells books online. He is in favor of the bill because he recognizes that "showrooming behavior" is a problem, where consumers evaluate products in stores, but ultimately purchase through a different retailer online. "Brick and mortar" businesses can compete on price but cannot sell without collecting sales tax. Small sellers would be exempt, including BookPeople. However, BookPeople collects tax on its online transactions because it is the "right thing to do" given the use of public roadways to deliver books to its customers. Collection is not difficult; with shipping information, software, which is radically cheaper than it was in the past, a company can easily fulfill its collection requirements. Texas had attempted to solve the inequity between local and remote sellers but they need a federal solution.

Scott Peterson, Executive Director of Streamlined Sales Tax Governing Board

Peterson, representing the Streamlined Sales Tax Governing Board, explained the role of the Streamlined Sales Tax Project and stated that one of its goals was to make software more efficient. The Streamlined Sales Tax Project certifies the accuracy of software and there are six companies that sell the certified software. If the software is erroneous in the computation of the proper tax, then the state is responsible rather than the retailer. Peterson also thought it was unfair for consumers to pay sales tax when making purchases in stores while escaping the payment of sales tax when making purchases via the Internet.

Steve DelBianco, Executive Director of NetChoice Coalition

DelBianco, also a witness at the House Committee Hearing, vehemently opposed the legislation, arguing that collection is far from simple. To illustrate, he presented an enlarged screenshot of an online purchase from BookPeople's Web site. BookPeople charged tax on the transaction based on the Austin tax rate (the rate applicable to its store location) rather than the destination rate (the rate of the Virginia address of the purchaser). DelBianco also argued that software was costly, comparing free software to a free puppy, which "comes with a lifetime of costs." Although small businesses are not necessarily creating a stir in opposition of this bill today, Congress will certainly hear from them once they have to face 46 state audits. In addition, the small seller exemption threshold is too small and will not include even a "mom and pop" shop. He also maintained that additional simplification requirements as well as an enforcement mechanism need to be drafted into the bill.

Question and Answer Session

Issues highlighted during the question and answer session between the senators on the Committee on Commerce, Science and Transportation and the witnesses included the following:

  • Software to implement new collection requirements. In response to DelBianco's presentation of BookPeople's online collection error, Bercu expressed surprise and assured that he would follow up with his software service provider to explore and resolve the issue. DelBianco explained that the complexity and expense of collection is due to the fact that each step of the transaction must be tied back to the software. Bercu insisted that if the bill passes, then other companies are sure to provide software services as well, which would bring the cost of software down. Peterson of the Streamlined Sales Tax Governing Board agreed.
  • States passing unconstitutional laws. Misener brought up states' attempts to craft sales tax nexus legislation that will permit them to reach remote online sellers. This type of state legislation raises significant constitutional concerns and if the Supreme Court addresses such legislation, it may rule differently than it had in Quill and if that occurs, then there may not even be a small seller exemption.
  • Online businesses enjoying local benefits. Sen. Mark Pryor, D-Ark., found it reasonable to have the point of sale determine the applicable tax rate for collection. For a store, the point of sale would be the store itself while for an online purchase, the point of sale would be the purchaser's home computer. He did not have an issue with applying the destination rate for online sales because he believed online businesses enjoy local services since the common carrier for delivery is using the local streets that are paid by local taxes and if a package is stolen at someone's door, then the local police handle the situation. DelBianco responded that Pryor was mentioning benefits that a common carrier receives (not the online retailer) and that UPS and other common carriers pay and remit enough tax to the local jurisdictions for these benefits.
  • Small seller exemption. DelBianco argued that the small seller exemption should be increased significantly based on the statistics showing that the top five online retailers are responsible for 90 percent of the uncollected sales tax at issue. Misener took the opposite position, preferring a lower threshold than the $500,000 in sales but acquiescing to the $500,000 amount.

Sen. Amy Klobuchar, D-Minn., supported the bill and submitted a list of 138 Minnesota businesses, inclusive of small store sellers, that support the bill in light of the confusion created by states passing varying nexus legislation in their own efforts to collect. However, Sen. Jim DeMint, R-S.C., opposed the bill because online businesses are different, and should be treated differently. It would be unfair to require them to collect when they do not take advantage of local services and they would then be required to collect based on destination rates whereas stores can continue to collect based on a store location's tax rate.

Overall, most participants appeared to support the bill and there were fewer calls for revisions or reworking of the bill than was the case for the Marketplace Equity Act. Still, Durbin himself opened up the discussion to determining an appropriate small seller exemption, indicating that the exemption was not set in stone but rather, very negotiable. Therefore, the Marketplace Fairness Act may see greater momentum if the small seller exemption is adjusted to appease more interested parties.

Commentary

Although there are still hurdles for supporters of federal nexus legislation based on the consensus that certain provisions of each bill must be revised and that certain concerns have not been adequately addressed, it seems inevitable that Congress will act in some manner. Still, legislative action is highly unlikely prior to the 2012 elections, considering that there are few legislative days remaining in which to come to a resolution that would be acceptable to a sufficient number of House and Senate members from both political parties. This grants additional time for the bills to be amended and to gain further traction. As such, passage of a bill, which may incorporate aspects of both the Marketplace Fairness Act and the Marketplace Equity Act, could occur in the next Congressional session beginning in early 2013, though a future version of the bill would have to be resubmitted for consideration. While not certain by any means, it is likely that the Marketplace Fairness Act's inclusion of a vendor compensation requirement for states that choose to impose a remote seller collection requirement will be a prerequisite to passage, as well as a flexible small seller exemption which may be less objectionable to those demanding a higher threshold amount.

Footnotes

1 House Judiciary Committee, "Hearing on: H.R. 3179, the 'Marketplace Equity Act of 2011,'" July 24, 2012. Further information on the hearing, including written statements by the witnesses invited to the hearing, can be obtained at: http://judiciary.house.gov/hearings/Hearings%202012/hear_07242012_2.html. In addition, for a discussion of the House Judiciary Committee hearing on the Marketplace Equity Act, held on November 30, 2011, see GT SALT Alert: House Judiciary Committee Meets to Discuss Remote Seller Legislation, Dec. 7, 2011.

2 Senate Committee on Science, Commerce, and Transportation Hearing on "Marketplace Fairness: Leveling the Playing Field for Small Businesses," Aug. 1, 2012. For further information, see http://commerce.senate.gov/public/index.cfm?p=Hearings.

3 H.R. 3179, introduced Oct. 13, 2011. For further discussion of this legislation, see GT SALT Alert: Alternate Federal Sales Tax Nexus Legislation Introduced, Oct. 20, 2011.

4 H.R. 3179, § 2(b)(1). States would be allowed to have higher dollar thresholds for both components of the small seller exception.

5 H.R. 3179, § 2(b)(2).

6 H.R. 3179, § 2(b).

7 H.R. 3179, § 2(c)(2).

8 H.R. 3179, § 2(c)(1).

9 Testimony on H.R. 3179, the "Marketplace Equity Act," July 24, 2012.

10 504 U.S. 298 (1992).

11 S.B. 1832.

12 This impact is for fiscal year 2012.

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