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Congress to Hear Testimony on Internet Sales Tax

3 min readBy: Joseph Bishop-Henchman

Tomorrow at 10:00 AM, the full U.S. House Judiciary Committee will convene a panel to discuss solutions on the Internet sales 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. issue. The growth of Internet commerce has collided with constitutional restriction preventing states from taxing out-of-state sellers who sell into their state.

A proposed bill, the Marketplace Fairness Act, would give states the power to collect online sales taxes as a quid pro quo for states simplifying their tax systems (although not simplifying them enough). States have been reluctant to simplify — 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. systems are getting more complicated not less — and have insisted that Congress act first. Some states have even passed their own laws and invited constitutional challenges. Meanwhile, the Marketplace Fairness Act passed the Senate last year but has not passed the House.

Hence, the hearing. The committee's chairman, Rep. Bob Goodlatte (R-VA), last fall released seven principles for an online sales tax: tax relief, neutrality, representation, simplicity, tax competition, states' rights, and privacy. Goodlatte's principles helped focus the debate on what type of bill should pass and now various speakers will be offering suggestions. One big item that has vanished from the discussion was the problematic notion of a "small-seller exemption" — ignoring tax complexity by just exempting some number of small sellers from it. Rep. Goodlatte has made clear that whatever system we come up with, everyone has to live under it.

The six witnesses are:

  • Former Rep. Chris Cox, now an advisor to NetChoice (online sellers). His testimony emphasizes the importance of the existing constitutional standard, insist on meaningful simplification, and criticize the Marketplace Fairness Act and the Streamlined Sales Tax project.
  • Joe Crosby, a principal with MultiState Associates and advisor to the retail industry. Crosby's worked on this issue for decades now, and his testimony discusses the possibility of requiring a simplified structure only for online retailers, leaving brick-and-mortar retailers with existing state sales taxes.
  • Stephen Kranz, a partner with McDermott Will & Emery, who has worked extensively as the business representative on the Streamlined Sales Tax Project. His testimony emphasizes the danger of continued congressional inaction as states strike out on their own and harm interstate commerce.
  • William Moschella of the shopping center industry represents retailers and his testimony urges adoption of the Marketplace Fairness Act. Alternatively, he suggests giving states the authority to ban interstate commerce that does not comply with state tax laws.
  • Andrew Moylan of the R Street Institute. His testimony favors origin-sourcing, the concept of taxing sales based on where the seller is located rather than where the customer is located. Origin-sourcing reconfigures the sales tax from a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. to a business activity tax, which is revolutionary. The most common critique of origin-sourcing is that it would lead to online sellers clustering in states with no sales tax, which is questionable.
  • James Sutton, a lawyer and CPA from Florida. His testimony discusses specific examples of sales tax complexity and errors by state administrators. Sutton also proposes something akin to a 1099 reporting regime, whereby retailers would collect information about their customers and provide it to tax authorities.

I'll be in the audience tomorrow morning and will hope to provide livetweeting commentary at @jdhenchman.