Sales Tax Slice: At Congressional Hearing, Witnesses and Lawmakers Flesh Out MFA Concerns, Debate “Origin Sourcing”

Roughly one week after an early March snowstorm swept through Washington, once again crippling a city infamous for its weather-related (over)reactions, the House Judiciary Committee finally held its hearing to discuss the federal Marketplace Fairness Act of 2013 (S. 743, H.R. 684). The topic for discussion? Well, the hearing’s title, “Exploring Alternative Solutions on the Internet Sales Tax Issue,” sheds some light into what lawmakers, specifically Chairman Robert Goodlatte (R-Va.), sought to accomplish.

Indeed, in anticipation of today’s hearing, several witnesses submitted testimony to the house committee regarding their impressions of the MFA in its current form and offering proposals and recommendations of alternative solutions. But while the solutions to the Internet sales tax issue are debatable, the diagnoses of the problems are generally accepted, and there are many. 

Among the problems plaguing the current online sales tax landscape is “inconsistent and unpredictable state-by-state action address[ing] collection,” Stephen Kranz, Partner at McDermott Will & Emery, LLP wrote in prepared testimony he submitted to the committee. In his testimony, Kranz refers to both state legislative approaches (for example, click-through nexus, use tax reporting, etc.) and aggressive policy and audit positions taken by state revenue agencies as contributing to confusion. 

To illustrate his point concerning state tax departments and their attempts to regulate which activities will meet the physical presence test handed down by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), Kranz uses Bloomberg BNA’s Survey of State Tax Departments to provide the following as an example of such inconsistency: “Florida says that selling gift cards in the state creates nexus, while Texas does not. On the other hand, Texas says that a remote seller has nexus if it attends a trade show in the state, even if no sales are made at the show and no orders are taken, but Florida says that trade show activity does not create nexus.”

While some of these problems are inherent as our purchasing habits migrate to the Internet, many stem from states seeking to reconcile technological advances with current sales tax laws, or their attempts to enact and enforce new ones. 

According to Kranz’s testimony, “the only viable alternative being discussed today is one in which Congress creates a federal framework to address the Internet sales tax issue based on a compact among the states but which leaves intact the general ability of states to decide whether, and on what, to impose a sales tax.” In essence, Kranz’s proposal advocates a compact similar to the Streamlined Sales and Use Tax Agreement, but which governs only online transactions.

Kranz also cautioned against the implementation of an origin-based sourcing system. Under this approach, sellers would be required to use the rates and rules that apply where their business is located, not where the purchaser resides, as the current version of the MFA mandates. Specifically, Kranz warned that “[t]his approach is so dramatic that it would likely result in the elimination of sales tax as a funding option for states.” Further, according to a tweet posted by Joseph Henchman, Vice President of Legal and State Project at the Tax Foundation ( @jdhenchman ) , who attended the hearing and live-tweeted throughout the session, Kranz indicated that the origin-based system could be exploited by simply re-locating sellers in (sales) tax-free states.

However, former Rep. Christopher Cox (R-Calif.), tax policy advisor for NetChoice, a coalition of leading e-commerce and online companies, called for a compact-based approach, while also advocating for an origin-based sourcing system. Cox’s approach, dubbed, “Home Rule and Revenue Return,” is “a multi-state Compact that would establish clear rules for interstate purchases on which sales tax currently is not being collected. States participating in the Compact would realize sales tax on purchases their residents make from remote businesses located in other Compact states.”

According to Cox, this concept “treats catalog, online, and brick-and-mortar sellers the same,” and “involves no new complications, because most retail business already takes place this way.”

In all, according to Marc Heller, Reporter for Bloomberg BNA’s Daily Tax Report, who also attended today’s hearing, the session was “long, [and] didn’t resolve anything but put some concepts like origin sourcing into the vocabulary.” However, the consensus among lawmakers is that “there is a problem, the playing field is uneven and Congress bears responsibility to do something,” Heller said. In addition, he further opined that, based on today’s hearing, the MFA would not pass the committee and that none of the ideas presented, on their own, would “carry the day.”

Other witnesses submitted testimony to the committee proposing various solutions to online sales tax dilemma as well. Their testimony is available online here .

Continue the discussion on the BNA State Tax Group on LinkedIn : Is the MFA the best, or most fair, solution to the Internet sales tax issue? Should Congress be turning their attention in another direction?

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