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US States Criticize New Internet Sales Tax Proposals

by Mike Godfrey, Tax-News.com, Washington

03 February 2015


The United States National Conference of State Legislatures (NCSL) has expressed its continued "disappointment and frustration" with the House of Representatives Judiciary Committee, and particularly its Chairman Bob Goodlatte (R – Virginia), regarding new draft legislation to enable states to levy sales taxes on internet transactions.

NCSL has written another letter to House of Representatives Speaker John Boehner (R – Ohio) on Goodlatte's recent draft Online Sales Simplification Act of 2015.

Currently, retailers are only required to collect sales tax in US states where they also have brick-and-mortar stores (that is, a physical nexus). State and local governments are said to view the taxes they cannot collect on most online sales as lost revenue, with the NCSL having previously calculated that the present "loophole" costs USD23bn in uncollected taxes each year.

A previous legislative attempt to close the "loophole," the Marketplace Fairness Act (MFA), was approved by the then Democrat-led Senate in May 2013. The MFA would have given states the option to require online retailers with national annual sales greater than USD1m to collect the tax, even if their websites lacked a physical nexus in the state.

The MFA was then sent for approval to the Republican-led House where it encountered a great deal of opposition, particularly on the grounds that it was considered to create new taxation and onerous compliance requirements. Although Republican opposition still remains strong, Goodlatte has proposed a restructured system of taxing "remote sales" in an attempt to overcome his colleagues' doubts.

Goodlatte's draft legislation adopts so-called "hybrid-origin sourcing," under which a state may tax a remote sale only if it is the Origin State (defined as the state in which the remote seller has the greatest average number of employees) and is party to a state distribution agreement (with revenue distributed among states through a clearinghouse).

Tax is applied at the Origin State's rate (including the local rate) and sellers may be audited only by their home state taxing authority. Double taxation is prevented, as states may not impose tax on a purchaser who paid sales tax at the Origin State's rate at the time of purchase.

The draft legislation is clear that "click-through" activities do not create a physical presence, contrary to the attempts of many states to expand the meaning of physical nexus to include affiliate businesses, which attract buyers by hosting a link to the retailers' websites in exchange for a commission for each sale.

Finally, remote sellers in states that do not impose sales tax would be required to collect tax using a "flat rate," or report sales information to the clearinghouse. The flat rate to be applied would be established annually by determining the lowest combined generally applicable state rate and an average local rate.

However, in its letter, the NCSL expressed its objection to Goodlatte's draft legislation in that it would, "not only impose new taxes on consumers in non-sales tax states, [but also] raise taxes on consumers who purchase products from higher sales tax states."

"We believe it preempts state sovereignty to levy taxes on its own residents, establishes a new sub-national entity to govern the collection of remote sales taxes, and codifies for the first time, 'taxation without representation,' as consumers will be forced to pay the sales tax rates decided by lawmakers in other states and jurisdictions," it added. "No longer would citizens have a say in the taxes they pay."

TAGS: compliance | tax | business | sales tax | commerce | law | internet | e-commerce | legislation | United States | tax reform | retail | Tax

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