Yesterday, the House Judiciary Committee held a hearing discussing alternatives to the Marketplace Fairness Act (MFA). The panel of witnesses proposed five different alternatives to the MFA. The alternatives suggested included a streamlined sales tax for interstate transactions, a multistate compact to collect and remit sales tax, new enforcement of use tax laws, allowing states to exclude rather than tax, and finally, origin-based collection.
Tax attorney Stephen Kranz, Partner at McDermott Will & Emery began by outlining each of the proposals about to be presented before the committee. He listed what he believed to be the merits and pitfalls of each proposal, but came to the ultimate conclusion that Congress should come up with the proper framework to deal with Internet sales tax problem because he believes that the alternatives presented today would radically change sales tax policy. He points out that the States have little authority on interstate commerce and Congress must act on the issue if it is to be solved.
Digital Liberty would disagree with Kranz's assertion that state's have little power in sales tax collection. States are currently empowered to collect sales tax on an origin basis but they know this would be vastly unpopular with their constituents so they are looking for a scapegoat in the federal government. States can also work to enforce use tax laws, which are already on the books. Additionally states have ignored the Supreme Court's Quill definition of physical presence and have begun passing affiliate nexus taxes and business privilege taxes. These laws are receiving inconsistent treatment front eh courts and creating uncertainty for businesses. What Congress should really do is clarify physical presence, so that sates stop over stepping their bounds.
James Sutton, Shareholder at Moffa, Gainor, & Sutton, P.A., a CPA and tax attorney from Florida cited that brick and mortar businesses are not hurting because of remote sellers, but rather because current use taxes are not being enforced. He argues that current use tax laws are what are truly to blame. Claiming that the tax system is in dire need of federal Consumer Private Reporting (CPR) legislation. The proposed CPR will require those online and catalogue retailers to provide their sales information with states so that people actually start reporting use taxes like they should be doing.
While Sutton is correct that states are not collecting use tax, providing sales information to state departments of revenue would be a vast invasion of privacy. Colorado passed a law along similar lines, which is facing serious challenges in court.
Joe Crosby, Principle at MultiState Associates, testified in favor of a streamlined sales tax for interstate commerce. Mr. Crosby cites the International Fuels Tax Agreement (IFTA) as an example of remote sales tax collection to make his case. What is that agreement? The major problem with this approach is that if a streamlined single rate was achieved between states, taxes would be increased and sovereignty would be reduced.
Andrew Moylan, Outreach Director and Senior Fellow at The R Street Institute, presented an origin based sales tax collection system. Moylan’s suggestion is that rather than dealing with the complexities and possible complications that accompany the MFA, the sales tax should be origin based, meaning that the tax should be collected by the state where the good is coming from and not where the good is going. This would simplify tax collection and reduce compliance burdens and due process concerns that almost every small business owner would encounter under the MFA.
Additionally the origin based system would preserve tax competition among the states. During questions, Chairman Goodlatte brought up the widely discussed concept of tax competition with the example of a county in New Jersey that charges half of the normal New Jersey sales tax because it has to compete with the bordering state of Delaware that does not charge any sales tax. This type of competition has been valuable to economic growth in the United States.
However, some fear a "race-to-the-bottom" for sales taxes. From Digital Liberty's perspective this would be a great thing! The idea of the “race to the bottom” is that businesses would uproot and set up shop in a state with no sales taxes. However, as it stands now, nothing is stopping businesses from racing to the bottom under current law. As Moylan pointed out during many different instances throughout the hearing; a company’s decision to relocate is much more complicated than simply what the sales tax is.
Chris Cox, legal counsel representing Net Choice, had a proposal similar to Moylan's origin system, which he referred to as the Home Rule and Revenue Return Concept. The idea he is proposing essentially treats all businesses the same. This means that brick and mortar are treated the same as online and catalogue retailers. According to his testimony, Mr. Cox’s proposal differs from the origin based system “which leaves tax money in the business’s state even though the purchaser is from another state… would distribute taxes received from out-of-state purchasers to their home states.” The distribution of taxes to the purchaser’s state would occur between states that participate in a voluntary compact. The goal with this solution being that state’s would be able to see tax revenue from out of state purchases that their residents make without complicating compliance issues like the MFA would potentially do.
Other questions that kept coming up included the lack of ideas on how to identify the seller of record for a business and whether or not the tax collection and remission software is truly capable of working like it is said to.
This hearing is a clear example that the MFA as it has gone through the Senate cannot possibly go through the House. Besides the fact that the general public do not favor it and the compliance burden it places on small businesses, the MFA clearly has many alternatives that seem to offer a better way to approach the issue of Internet sales tax.