Identical bills have been introduced in Congress which would grant each state the power to require collection of sales and use 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. es by sellers with no physical presence in the state (PDF here). The “Marketplace Fairness Act” (S. 336 and H.R. 684) is the latest step of a lengthy and rigorous effort to expand state tax authority beyond historical limits, increase state revenue, end an economically unjustifiable tax treatment disparity between brick-and-mortar retail sales and online/catalog sales, and bring about uniformity and perhaps even simplification in the nation’s byzantine 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. system.
In a presentation I routinely give, “The History of Internet Sales TaxAn internet sales tax is a sales and use tax collected and remitted on remote sales, many done online. In 2018, the U.S. Supreme Court ruled that states could impose such obligations on sellers lacking physical presence in the state, vastly expanding the reach of these collection and remittance requirements. ation: 1789 to the Present,” I explain at least seven identifiable perspectives on the issue. It’s a complex one with a lot of big players. On one hand you have the idea that state services are bound geographically and therefore so should state taxation. On the other you have justifiable outrage at consumers buying stuff online without paying tax while brick-and-mortars have to collect. Proposed solutions include origin sourcing (taxing based on the seller's location, rather than the buyer's), a national online sales tax (ugh), the status quo of course, and the approach taken by these bills – expand state tax authority in this one area while requiring significant sales tax system simplification by each state that opts to take advantage of it.
The bill mostly resembles the Senate version of the bill from the last Congress, with some changes. Below I go through what’s in the bill, and then offer suggestions about what’s not in the bill.
- States belonging to the Streamlined Sales & Use Tax Agreement (as of the date of passage of the Act) may, no earlier than 90 days after the passage of the Act, require sellers to collect and remit sales and use tax, so long as the Agreement includes the bill’s minimum simplification requirements. (This would be 22 states: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.)
- States that do not belong to the Streamlined Sales & Use Tax Agreement may, no earlier than 6 months after the passage of the Act, require sellers to collect and remit sales and use tax, so long as the state abides by the bill’s minimum simplification requirements. (This would be all other states with sales taxes.)
The bill’s requirements for state legislation:
- Specify the tax or taxes to which authority and simplification requirements apply.
- Specify the products and services that would otherwise be subject to the tax but are not.
- Designate a single entity in the state responsible for sales and use tax administration, return processing, and 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. ing.
- Provide a single audit for all state and local taxing jurisdictions in the state.
- Provide a single sales and use tax return to be used by sellers and filed with the single entity in the state. The state cannot require more filing by remote sellers than is required of nonremote sellers, and the bill specifically prohibits local jurisdictions from requiring remote sellers to submit a sales and use tax return or collect tax, aside from the single entity procedure outlined.
- Provide a uniform sales and use tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. within the state for all taxing jurisdictions. (Arizona and Louisiana are considering this reform now, and other states that would need to change are Alaska, Idaho, New Jersey, and North Carolina.)
- Source interstate sales as follows: The default sourcing rule will be where the item is received by the purchaser. If no delivery location is specified, it will be sourced to the customer’s address as known by the seller, including the payment address if no other address is known. If address and billing address are unknown, it will be sourced to the address of the seller.
- Provide a list of taxable products and services, a list of exempt products and services, and a rates and boundary database. Professor Richard Pomp has criticized this section as inadequate, as it would permit “disparate, if not inconsistent definitions of what is taxable and what is exempt.” Pomp suggests more uniformity in such definitions, and I would suggest this could be done with a standardized list of defined products and services that could be used by all states. Heck, I could prepare it for Congress if they wanted, but there needs to be one to make sure state rules can be compared apples-to-apples. Obviously there's a balance here – the list can't be set in stone because products change – but the bill is presently at one extreme.
- Provide free software that calculates the sales and use tax for each transaction, files sales and use tax returns, and updates rate information. Establish certification procedures for persons to be approved as software providers. Such software must be capable of calculating and filing sales and use taxes in all states.
- Relieve sellers of liability for any error if they rely on the software, and relieve certified software providers of liability for any error if they rely on information from the state. Also relieves the software providers of liability for any error they make if they rely on the remote seller.
- Provide 90 days notice to remote sellers and software providers of state or local tax rate changes, and relieve from liability any failure to collect the additional tax for any part of the 90 days where the rate increase is in effect. (This would of course affect the timing of any sales tax increase, but would also impact states that have sales tax holidaySales tax holidays are periods of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, and more. s.) The bill noticeably does not require any notice of sales tax base changes, which are often harder to catch than rate changes. These are especially problematic for state sales tax holidays.
- Exempt small sellers from this expansion of state tax authority. The threshold amount of sales will be subject to further discussions, but at present the bill sets it at $1 million in annual sales. The amount is not inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -adjusted.
The bill also specifies:
- That its expansion of state sales and use tax authority shall not be construed as an expansion of authority regarding franchise, income, occupation, or any other type of tax; affecting the application of such taxes; or enlarging or limiting state authority to impose such taxes.
- No actions taken with regard to complying with this legislation can create nexus between a state and a person.
- Neither enlarges or limits state powers to license or regulate any person, license or regulate intrastate business, impose non-sales taxes, or exercise authority over interstate commerce.
- Does not encourage states to expand sales taxes to goods and services not presently taxed.
- Does not alter rules for intrastate sales taxation and sourcing.
- Does not alter or preempt the Mobile Telecommunications Sourcing Act.
- “State” includes the District of Columbia, Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, and the Northern Mariana Islands.
Things the bill does not do but could:
- Offer remote sellers the option of a single blended sales tax rate for each state. 38 states have local sales taxes, and presently there are over 9,600 sales tax jurisdictions in the United States. The trend is more jurisdictions each year. Offering this option, even if just for small sellers, would greatly reduce the complexity of compliance down to a more manageable 44 tax rates. We produce such a blended rate calculation twice a year (based on population-weights and tax rates for each zip code). (States with a state sales tax but no local sales taxes are Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Rhode Island, and the District of Columbia. Virginia would usually be on that list but will be adding non-uniform local sales tax rates soon.) Some effort to rationalize the number of jurisdictions would be nice, even if it was just to align them geographically by 5-digit zip code boundaries.
- Immunity for remote vendors that misapply sales tax holidays, and/or expanding the 90 day notice requirement for rate changes to include base changes.
- Pre-emption of state efforts to require remote seller collection of sales and use tax beyond the procedures in this bill. If this bill passes, such destructive “Amazon tax” and “click-through nexus” proposals would be unnecessary but likely still pursued by states seeking to overreach their authority and evade the hard work required of them by this bill.
- Establish federal court jurisdiction, or indeed any procedure at all, for challenging a state’s failure to comply with the bill’s requirements.
Every year since 1992, advocates of expanded state sales tax authority have said that this year will be the year that they win. Past methods have included defiance and passing unconstitutional state laws, so the approach of hammering out a trade that would result in a simpler system is a welcome one. The sponsors continue to express a willingness to improve the bill. I hope it's a sincere one, as a few more improvements would be welcomed! I'm on record as predicting such a bill will pass inside of three years, but I'd like it to be a good one.Share