Sales Tax Slice: Will Goodlatte’s Basic Principles on Remote Sales Tax Drive the MFA Toward Passage, or Cause It to Stall?

House Judiciary Committee Chairman Rep. Bob Goodlatte (R-Va.) released his priorities for remote sales tax legislation yesterday, and they don’t exactly match up with the Marketplace Fairness Act that the U.S. Senate passed in May, as reported in Bloomberg BNA’s Daily Tax Report.

The release outlined seven basic principles on remote sales tax. They include avoiding unequal tax treatment between online and brick-and-mortar retailers, giving those who pay state taxes greater ability to challenge them in that state’s forum, making compliance simple and inexpensive enough that a small business exemption would be unnecessary, encouraging competition among states to keep tax rates low, and supporting state sovereignty issues, including the idea that the federal government should not mandate that states impose any sales tax compliance burdens.

Even if the MFA passes Congress, then what?

The U.S. Senate's passage of the MFA was an important milestone toward the passage of legislation granting states the authority to require collection and remittance of sales or use tax by out-of-state retailers. But the legislation's prospects remain uncertain from a substantive and political standpoint. Regardless of the legislation's fate, state sales tax laws continue to dramatically lag behind widely adopted technological and business innovations such as cloud computing. Significant challenges would remain in achieving substantial uniformity in state sales and use tax laws, even if the legislation is enacted.

Substantively, the Senate legislation is grounded upon the authority of Congress under the U.S. Commerce Clause to enact legislation on matters affecting interstate commerce. It is unclear, however, if the MFA would withstand scrutiny under the Due Process Clause, some prominent tax experts suggested in a recent Bloomberg BNA State Tax Advisory Board Roundtable discussion. If such a challenge was successfully made, its impact could be limited. Instead of striking down the entire act, a court would likely rule for a taxpayer making the challenge on an “as applied” basis.

Many of the sales tax compliance challenges that exist today would remain even if the MFA is enacted. The legislation does not require the states to adopt uniform administrative rules. Questions surrounding the nexus policies of states that decline to simplify their sales tax laws in conformance with the legislation would linger. Another question is whether an attempt will be made to tack onto the legislation tax proposals that have been traditionally unpopular with the states. This could include the Mobile Workforce Act, Business Activity Tax Simplification Act (BATSA), the Digital Goods Services Tax Fairness Act, and even the Internet Tax Freedom Act, which expires in 2014.

Comments from experts

Karl Frieden, vice president and general counsel of the Council On State Taxation, pointed out during the discussion that the MFA will not render click-through and other sales and use tax nexus cases irrelevant. “Some states may choose not to meet the MFA requirements and therefore ‘physical presence’ will remain the nexus standard in those states,” Frieden said.

Joseph Henchman, vice president of legal and state projects and vice president of operations for the Tax Foundation, said that every year people say legislation similar to the MFA will be passed, and it can sound convincing. However, he said he finds it hard to believe it will pass because he thinks the only way it will survive the Republican-controlled House is if it’s attached to BATSA or the Mobile Workforce Act. “If that happens, the states will walk and they will actively oppose it,” Henchman said. 

A special report containing a full transcript of the discussion at the roundtable by prominent state tax experts, along with additional background information, will be published Sept. 27. 

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