government affairs blog

Internet Sales Tax Fairness: A Tale of Three Proposals

Posted by Sheila Andrews on February 10, 2015

When the debate over Internet sales tax parity began, the Marketplace Fairness Act (MFA) was a simple solution for leveling the playing field between brick and mortar businesses and online retailers. However, as occurs in all things legislative, the simplest solution comes with some of the strongest objection.

The MFA as drafted would simply provide states with the ability to collect sales taxes on purchases made by people and businesses within their jurisdictions based on the tax rate applied to the buyer’s address. The benefit of such an approach, also called “destination sourcing,” is that it is simple and fair. The system under the MFA looks like this:

  1. The rate of tax is calculated based on the buyer’s address; 
  2. The tax is collected by the remote seller, and remitted back to the state of the buyer’s address.

Buyers, especially those in non-sales tax states, are not required to pay a tax beyond that mandated by their legal residency. The MFA also requires that online retailers are provided free software to perform the collections, remittance and proof of sales for auditing purposes that integrates into their Internet shopping cart systems. Additionally, online retailers doing less than $1 million in remote sales do not have to comply with the online tax collection.

Seems like a fairly easy approach that eliminates the unfair pricing advantage that online retailers have over physical store fronts. Yet, legislators, for reasons not entirely clear, have objected to certain details of MFA and have drafted two new proposals that have already slowed progress of the legislation.

One concern being expressed by some legislators is that MFA provides an exemption for small sellers, but brick and mortar stores do not get exemptions from sales tax collection unless they are in a no sales tax state. So the second proposal to emerge would phase out the exemption for small sellers over three years, but keep the “destination sourcing” principle. Proposal two, would look like this:

  1. The rate of tax is calculated based on the buyer’s address;
  2. The tax is collected by the remote seller and remitted back to the state of the buyer’s address:
    • In year one, all remote sellers doing less than $10 million in online sales are exempt.
    • In year two, all remote sellers doing less than $5 million in online sales are exempt.
    • In year three, all remote sellers doing less than $1 million in online sales are exempt.
    • In year four, no remote sellers are exempt.

Only a few layers are added into what is still a fairly direct solution to the Internet sales tax issue, but those are easy enough to incorporate into the legislation. Furthermore, the software being provided has the capabilities to incorporate these requirements into their systems. So why not stop there? Or as some elected officials might prefer, why stop there?

The third legislative option being proposed is called “hybrid-origin sourcing.” And no, it does not mean only states where all residents drive hybrid vehicles can participate, but it does make it pretty difficult for states to apply the new law. The system under the third proposal would look like this:

  1. Online retailers are determined to have a physical presence in a state depending on a series of factors, including where the largest amount of employees exist, whether they do business in a state for more than 30 days, and others.
  2. Online seller pays the tax rate on purchase based on state presence of the retailer.
  3. Retailer sends the tax rate collected to their state tax revenue department, along with the zip code of the purchaser that is provided at the time of sale.
  4. If the retailer’s tax rate is higher than that of the purchaser, the balance of the revenue is kept by the retailer’s state.
  5. Seller’s state then sends the amount, along with the zip code, to a newly formed Internet Fairness Tax Act tax revenue board, as required by the law.
  6. The law only becomes effective if each state participating in the opting-in to the program develops their board within 90 days.
  7. All members of the board are appointed by the governor.
  8. The buyer’s state IFTA board then keeps a portion of the revenue while remitting the rest to the buyer’s county of jurisdiction, as determined by their zip code
  9. States that do not currently have sales tax laws have the option of participating in order to receive tax revenues from purchases made by out-of-state buyers.

Of course, the third option raises the question of whether its authors are attempting to move the bill forward or actually muddy up the water, creating more questions than answers and mandating additional layers of state bureaucracy that are sure to bring objections.

On some level it is heartening that the debate last year as to whether Internet sales should be taxed has now morphed into an argument this year over how that tax should be imposed. This is clearly progress. However, it is also ironic that when Congress is seriously looking at the simplification of a tax code, that proposals are being discussed that would lead to a more complicated and expensive system to implement for retailers and states. Legislators need to look beyond the smoke that is being produced during the debate and look for a workable proposal that would instill fairness in the collection of sales tax from online sales. 

Keywords: Competition, Taxes

My New Year’s Resolutions for the 114th Congress

Posted by Aaron Lowe on December 15, 2014

With a little luck, we are reaching the end of the 113th Congress.  By nearly every measure, this was the most unproductive sessions in U.S. history.  In fact, it really is difficult to point to any major accomplishments from this Congress over the past two years.  So, if you are a glass half empty type of person, Congress has a lot of major issues that need to be addressed next year.  If you are a glass half full individual then the 114th Congress, with Republican majorities in both the House and Senate, will have nowhere to go but up (or at least that is what we hope).

So, in the holiday spirit and being the positive industry lobbyists that we are, let’s take a brief look at some of the issues that Congress could take up next year for the benefit of the U.S. economy and specifically the auto care industry.

Highway Trust Fund: There are not many people in Washington, or even around the Nation, that do not believe that the U.S. needs to come up with a dependable and adequate source of funding for transportation infrastructure.  Currently, the highway trust fund is sustained by an 18.5 cent gas tax which has not been increased since 1983. Meanwhile, revenues from this tax have dwindled, due in part to the fact that today’s vehicles are more fuel efficient; while the list of transportation infrastructure needs has skyrocketed.  When we can’t adequately move goods from one place to another efficiently, the entire economy suffers, including the auto care industry.

The current Highway Trust Fund authorization runs out in May, and coming up with a long term funding proposal has been stymied by political fear in Congress of raising taxes on motorists.  So the question is: how does Congress find a politically acceptable way to come up with a long term solution that provides adequate funds for our transportation infrastructure?  The answer probably lies somewhere between finding the political courage and coming up with a creative funding scheme.  In any case, the time to act is now before U.S. infrastructure looks more like a third world country than one of the leading nations in the World.

Tax reform:  Like the Highway Trust Fund, there is little disagreement that the current U.S. tax code is a mess.  The extremely complicated and confusing code makes compliance difficult and expensive.  Further, while the market distorting loopholes may be a boon to some, to most others, they are a burden; and oh yes, we have the highest 35 percent corporate top tax rate in the world.  However, while reforming our arcane tax code may seem like a no brainer, the devil is in the details.  What tax breaks could be canceled?  Should reform be revenue neutral or increase revenue? And should reform be proposed for all taxes, or just corporate taxes. 

Tax reform is definitely a difficult issue, but it appears that if there is anything that the new Republican majority and the President agree on, it is that reforming the tax code would make sense for the domestic and international economic benefit of U.S. businesses.  In addition, there is some discussion that a long term funding source for highway infrastructure could be included in a reform measure, making this a win for everyone (ok, not everyone is going to like what comes out).   So let’s see if the White House and Obama can come together to demonstrate that these warring factions can govern. 

E-Fairness:  How do you justify not charging state sales tax on Internet purchases when brick and mortar businesses must collect sales tax on every purchase?  There are some conservatives that say that this is a new tax although it is still unclear to me how this is true since consumers are supposed to pay sales tax whether it is collected by the company or not.  While it seems like the fair thing to do, passage of e-fairness legislation is not a slam dunk and we can expect the battle over this legislation to continue in the 114th Congress.  However, with the strong support by the retail community, maybe Congress will finally do the right thing and level the playing field for collection of sales taxes.

Reform Chemical Regulation:  Most businesses and environmentalists agree that the current system for approval and review of chemicals based on their impact on health and safety is antiquated and needs fixing.  Modernization of the Toxic Substances Control Act (TSCA) which authorizes the Environmental Protection Agency (EPA) to oversee use of chemicals in products is a priority for both sides which makes it seem likely that a compromise bill could be worked out.  So here is the rub, businesses want the changes to TSCA to preempt the many state laws that are popping up around the country to regulate the use of chemicals and environmentalists and state governments want state laws to continue to be in full effect, whether or not a federal law is passed. 

Ok, so I understand the perception that many of these state laws, particularly the one in California are more stringent then what EPA might do, and I also understand that states regulators hate to cede power, but products containing chemicals are sold nationwide and not only in one state.  Therefore, attempting to regulate state- by- state makes little sense either economically or from a regulatory point of view.  This needs to be a national rule so that companies are able produce and distribute products containing chemicals around the Nation.  While that standard needs to protect human health, it also should continue to permit companies to provide consumers with innovative and effective products.  So here’s hoping that we can obtain some logic in the upcoming discussions on TSCA reform and that this issue can be worked out so that an effective national program for protecting the health and welfare of U.S. consumers can finally be enacted.

Trade Promotion Authority:  There are two major trade agreements currently being negotiated: one in Europe through the Transatlantic Trade and Investment Partnership (TTIP) and one in Asia through the Trans Pacific Partnership (TPP).  Both these agreements have the potential to increase export opportunities for U.S. auto care companies. 

However, for these negotiations to ultimately result in agreements, Congress needs to provide trade promotion authority (TPA) such that any treaty will receive an up or down vote in the Senate rather than subject to amendment which would prevent any trade related treaty to move forward. TPA is important for our economy and for our industry and the time has come for Congress to act. 

So that is some of my hopes for the New Year.  While we wait for the 114th Congress to take their seats in January, I hope everyone has a great holiday season!

Keywords: Chemicals, Congress, Taxes

Tax Reform for ALL Businesses

Posted by Paul Fiore on August 01, 2013

As we approach the August congressional recess, the attention of many Capitol Hill denizens is focused on tax reform. Much is at stake here as our congressional leaders have reached out to the public (businesses) at an unprecedented level, seeking real input, which in and of itself is a rare occurrence in Washington. Leadership in the Senate Finance and House Ways and Means Committees has made no secret of their desire to accomplish this task. This alone is significant, as most insiders agree that the opportunity appears to come along about once a generation. This possibility is given even more weight by the announced retirement of current Finance Chair, Senator Baucus, D-Mont., at the end of his term. Senator Baucus would clearly like tax reform to be one of his legacies once he leaves office next year.

Back in May of this year, the Congressional Research Service (CRS) released a report detailing current proposals in Congress, which at the time varied from the abolishment of most of the federal tax code and the adoption of a 23 percent national retail sales tax (H.R. 25/S. 122), to a flat tax where an individual is taxed on wages and businesses are taxed on cash flow (H.R. 1040). The report went on to detail the options available to Congress, and in its conclusion, outlined the challenges they will face in the process. It is here in this struggle within the Congress that as an association, we must stay focused on the possible outcomes that will have such far-reaching consequences for AAIA-member businesses.

Perhaps the most important aspect of tax reform for AAIA members is that it should be neutral among different types of businesses, so that businesses are not favored based on their form of legal entity (e.g., C-corp. vs. S-Corp. or pass-through). This goal was brought home several weeks ago when the small business lobbying community learned that the relevant committees were being heavily lobbied to bring down tax rates for C-corporations at the expense of all other businesses.

Convincingly, the CRS in the same report aptly described what is needed at this time - a tax policy [that] considers equity (or fairness), efficiency, and simplicity. Equity examines the distribution of the tax burden across different groups. This information can then be used to assess the “fairness” of the tax system. A tax system that is economically efficient generally provides neutral treatment, minimizing economic distortions and maximizing output. A tax system that is simple reduces administrative and compliance costs while also promoting transparency.

AAIA is committed to the establishment of a neutral tax system and to that effect, has decided to take an active role on the Steering Committee of the newly-formed Coalition for Fair Effective Tax Rates. The coalition currently consists of around 100 members, including the Retail Leaders Association, the National Federation of Independent Business and the National Association of Wholesalers-Distributors. Announced on July 23, the mission of the coalition is to educate Congress and key stakeholders that tax reform should be viewed through the lens of effective tax rates, the amount of taxes businesses actually pay. The hope is that effective-tax-rate comparisons will bolster legislation that broadens the tax base, while lowering rates for corporations as well as pass-through businesses.

The earlier-referenced “congressional leaders” are encouragingly bi-partisan at the committee level. Just last Tuesday, in response to President Obama’s own tax reform speech in Chattanooga, Chairman Camp, R-Mich. and Chairman Baucus released a joint statement stating, "We welcome the president’s recognition that our broken, outdated tax code is making it harder for U.S. companies to compete and American families to get ahead. Making the tax code simpler and fairer by closing loopholes and lowering rates for families and employers of all sizes will strengthen our economy, while creating more jobs and higher wages.” We couldn’t agree more, and we will continue our efforts through the coalition as the real work, defending against those who are fighting to protect the loopholes and special interests, is just beginning.

Keywords: Congress, Taxes

Leveling the State Sales Tax Playing Field

Posted by Aaron Lowe on May 10, 2013

The Senate returned from its one week recess on Monday, May 6, and in their first major action, overwhelmingly passed (69-27) the Marketplace Fairness Act (S. 743). As you may have already heard, this bill will permit states to collect sales and use taxes on Internet sales into a state from vendors that do not have a brick and mortar location in that state. Proponents of the legislation were the nation’s major retailers, who claimed that the present system was unfair by forcing them to charge state sales tax on purchases of their products in the stores while Internet companies could sell the same products tax free. Also supporting the bill were the state governors that claimed, according to the National Conference of State Legislators, that they are losing about $23 billion in revenue due to the fact that they cannot collect the tax from the vendor. This is a no-brainer for states that are desperate for revenue. In Maryland, where AAIA is located, the state legislature passed legislation that will place a 1 percent sales tax on gasoline in July 2013, with a 5 percent increase in the tax taking place in 2016 should Congress not enact the Marketplace Fairness bill.

Many argue that Congress, through passage of this bill, is creating a new tax, but it seems to me that this is more of a case of fairness between brick and mortar and Internet sales. Both are competing for the same customer dollars for the same products, only one can charge significantly less -- about 6-10 percent less -- depending on the size of the sales tax. Further, it should be noted that many states require that the purchaser of the product pay the sales tax if it is not collected by the vendor, but of course that never happens.

The one argument raised by the opposition that does appear to me to have merit, is that the new legislation will place a major burden on small businesses operating over the Internet that will need to both collect the tax from customers in multiple locations and then pay each state the appropriate sales tax. The bill seeks to address this issue by exempting companies with less than $1 million in online sales across the US in a calendar year. The bill further requires states to provide remote retailers with free software to calculate taxes, file returns and communicate with the tax collection entity in each state. Further remote retailers will only have to report and file returns one time. While these provisions will help, Congress should probably look at this issue closely to ensure that small businesses will not be overly saddled with compliance burdens. However, it should be noted that the small business aspect works both ways since many brick and mortar small businesses are placed at an extensive competitive disadvantage when their Internet competitors do not need to collect sales tax from customers.

While the strong vote in the Senate provides some momentum for this measure, the House will be a tougher road since many conservatives have made this into a no new taxes issue. Further, Speaker of the House John Boehner, R-Ohio, recently announced that he will oppose the measure. So, if you support the ability of states to collect sales tax on Internet sales, you need to make your feelings heard by your representative. Clearly, while this legislation stands the best chance in years for obtaining enactment, it is going to take a strong push from the business community to make it happen.

Keywords: Congress, Taxes