UPDATE: Updating this morning’s alert on the House Judiciary Committee markup of three key state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. bills, the committee passed all three to the full House for consideration. The Mobile Workforce bill was approved on a bipartisan 23 to 4 vote, with Reps. Conyers (D-MI), Nadler (D-NY), Chu (D-CA), and Jeffries (D-NY) voting no. Rejected amendments included to reduce the 30 day threshold to 14 days (Nadler, failed 7 to 21), to add income thresholds for the bill’s protections (Nadler, failed in voice vote), and to exempt New York from the bill (Jeffries, failed in voice vote). The Digital Goods bill was approved on a bipartisan voice vote, after approving an amendment making three technical corrections (Smith, approved by voice vote). The BATSA bill was approved by a party-line vote of 18 to 7, with Republicans voting yes and Democrats voting no, after rejecting amendments to strike the physical presence language (Nadler, failed 7 to 13) and to delay implementation until 2026 (Chu, failed 7 to 16). While some members referenced Internet sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. bills, none were considered.
It’s shaping up to be a week of activity on state tax bills in Congress. A new bill setting rules for collecting sales tax on interstate transactions was proposed Monday by Reps. Jason Chaffetz (R-UT) and Steve Womack (R-AR), and today, the House Judiciary Committee will mark up bills setting interstate tax rules on individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , business activity taxes, and sales tax on digital goods. I’ll be live-tweeting the markup session, which starts at 10:00 AM ET this morning, from my account @jdhenchman.
(The Chaffetz-Womack bill, the Remote Transactions Parity Act (H.R. 2775), would authorize states to require collection of their sales tax by out-of-state retailers. Presently, states can only require retailers with a physical presence in the state to collect sales tax; for example, prominent e-retailer Amazon.com collects sales tax in 25 states, primarily the states where it has warehouses or other facilities. RTPA is similar to an earlier bill, the Marketplace Fairness Act, in that it allows states to impose collection obligations if those states make their sales taxes simpler and more uniform, easing the burden of collecting nearly 10,000 sales taxes across the country. RTPA adds the requirement that states integrate freely-provided tax lookup software into retailer systems, and it also sharply limits the ability of states to auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. businesses without physical presence.
However, neither RTPA nor MFA will be the subject of today’s markup (although they came up a lot when a subcommittee held a hearing a few weeks ago). Judiciary Committee Chairman Bob Goodlatte (R-VA) has his own alternative, the Online Sales Simplification Act, which would convert the sales tax from a tax on consumers to a tax on businesses, called hybrid origin sourcing, a seemingly simple solution that has a lot of major flaws. In the background are courts turning a blind eye to state efforts to simply order collection by online retailers without any simplification obligations whatsoever. More on RTPA, MFA, and OSSA later.)
The three bills today are:
The Mobile Workforce State Income Tax Simplification Act
The Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) limits states from imposing or collecting individual income tax on those who are in the state for less than 30 days. Most states technically require such payments when someone is in the state for even a day, and even withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. to be set up in advance, and we’re increasingly hearing horror stories of states trying to collect these sums. Since all states provide a credit for taxes paid to another state, making people fill out 20 or 30 tax returns for a net national wash is lunacy. Most everyone, except New York officials and state tax administrators, support this legislation. (State tax administrators instead urge states to voluntarily adopt a more convoluted model, which no state has.) The bill excludes entertainers and athletes from its protections, which it shouldn’t. Lead sponsors of Mobile Workforce are Reps. Hank Johnson (D-GA) and Mike Bishop (R-MI).
The Digital Goods and Services Tax Fairness Act
The Digital Goods and Services Tax Fairness Act (H.R. 1643) establishes national standards for when and how states can tax digital goods and services. By their very nature, it’s a little hazy where these goods are purchased, and there’s real danger that a number of states will try to tax each transaction (where the purchaser lives, where the business is located, where the warehouse is, where the server is located, etc.). The standard set is that only the state where the customer is located and primarily used the good or service gets to tax the transaction. If that is unknown, the delivery location is used, and if that is unknown, the location of the seller is used. This bill is also widely supported, except by state tax administrators. Lead sponsors of Digital Goods are Reps. Lamar Smith (R-TX) and Steve Cohen (D-TN).
The Business Activity Tax Simplification Act
The Business Activity Tax Simplification Act (H.R. 2584) limits state power to impose corporate income taxes and gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es to businesses with physical presence in the state for at least 14 days. While that is the historical standard, states have begun shifting to an “economic nexus” standard, imposing taxes on businesses with no connection to the state except that they have sales there. This exporting of tax burdens adds complexity, litigation, compliance costs, and uncertainty. We hear lots of horror stories of states suddenly imposing years’ of back taxes on companies who had no expectation of owing taxes in that state because they have no property or employees there. Congress last acted on this in 1959, when they passed PL 86-272, which prevents states from taxing businesses whose only connection to the state is salesmen taking orders. The rise of the Internet and faster transportation has allowed states to get around this limitation fairly easily, and BATSA is viewed as a modernization of that law. BATSA is heavily contested, as states will lose about 5 percent of their state corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. collections (albeit collections from non-resident businesses who are properly taxed by other states), with the impact uneven across the states. BATSA was actually considered dead for the time being given Congress’s institutional problems, but was suddenly resurrected earlier this month. Lead sponsors of BATSA are Reps. Steve Chabot (R-OH) and Bobby Scott (D-VA).
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