September 2, 2016

House Judiciary Committee Chairman Bob Goodlatte (R-VA) has unveiled draft legislation that would allow states to enforce local sales and use-tax laws on remote sales.  Under the proposed measure, entitled the Online Sales Simplification Act (OSSA), remote sales would be taxable according to the tax base of the retailer’s state, at a rate set by the buyer’s home state. 

For example, if an online vendor from Virginia sells a shirt to a customer in California, the vendor would use Virginia’s rules for taxing clothing but would collect a tax based on a single rate established by California.  Furthermore, each state would be required to adopt a single tax rate, which could be no higher than the statewide rate plus the weighted average local tax rate. 

This new “hybrid” approach represents an improvement from an initial draft of the legislation, which would have required Internet vendors to collect their own home state sales taxes and remit those proceeds to the customer’s home state.  In other words, the aforementioned Virginia retailer would have been required to collect the sales tax at Virginia’s rate (using Virginia’s tax base) and remit that payment to California.  This “origin-based” approach would have favored low or no-tax states at the expense of states like California that have a higher tax rate.

Other Pending Bills – The Marketplace Fairness Act and the Remote Transactions Parity Act

There are a number of fundamental differences between OSSA and CSAC-endorsed legislation – the Marketplace Fairness Act (MFA; S 698) – which is currently pending in the Senate.  MFA would give states the ability to collect state and local sales taxes from out-of-state Internet retailers based on the final destination of the purchase (and using the destination state’s tax base).  From the county perspective, this is the preferred alternative, as it will ensure that local governments receive their fair share of the tax revenues.

A third proposal, which is sponsored by House Oversight and Government Reform Committee Chairman Jason Chaffetz (R-UT), also seeks to provide sales tax parity.  Like MFA, the legislation – the Remote Transaction Parity Act (RTPA; HR 2775) – would establish a destination-based approach to online sales tax collection and remittance.

A number of key similarities/differences between the three measures are highlighted below:

Tax Collection Authority

MFA and RTPA would grant sales tax collection authority to states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA).  States, such as California, that do not wish to join the SSUTA could instead choose to adopt a minimum set of simplification requirements that are outlined in the legislation.  OSSA, on the other hand, would require states to become a party to a new distribution agreement and participate in establishing a clearinghouse to share sales-tax revenues.  States that do not participate in the clearinghouse would face significant restrictions on their ability to collect sales taxes from remote sellers.  In addition, OSSA includes specific provisions aimed at encouraging those states without a statewide sales tax (New Hampshire, Oregon, Montana, Alaska, and Delaware) to participate in the clearinghouse.

Audit Protections

One major criticism of MFA is that it could leave small businesses vulnerable to multiple audits in every state where goods are shipped.  RTPA attempts to relieve this potential burden by strengthening audit protections for small businesses.  Specifically, under the Chaffetz proposal, companies that use certified software would only be subject to an audit from their home state or any state where the company has a physical presence.  Furthermore, businesses with less than $5 million in gross annual sales would be fully exempt from remote sales tax audits, unless there is a reasonable suspicion that the seller has engaged in intentional misrepresentation or fraud.  Under OSSA, only the origin state may audit a seller for remote sales, although the destination state would have the ability to request information.

Small Business Exemption

Both MFA and RTPA include language that would exempt small online retailers from the tax collection requirements.  Specifically, MFA would exempt vendors with less than $1 million in annual remote sales, while RTPA would gradually phase out the exemption over a period of four years.  In year one, businesses with less than $10 million in gross annual sales would be exempt.  By the second year, the threshold would drop to $5 million, and by the third year, only businesses with less than $1 million in gross revenue would be exempt from tax collection requirements.  The exemption would be completely phased out by year four.  It should be noted that there would be no exemption for products sold over an electronic marketplace, such as eBay or Amazon.  OSSA, on the other hand, does not include any sort of small business exemption.

Tax Software

Both MFA and RTPA would require states to provide remote sellers with free software that is capable of determining the proper tax rate in every state and locality.  RTPA would go a step further to ensure that the software is capable of electronically collecting and remitting the taxes owed.  The legislation also would require states to pay for set-up, installation, and maintenance costs of such software.  OSSA does not include any software provisions, as the system is theoretically designed to operate so that no such software would be required.

Looking Ahead

Each one of the three proposals has its own set of detractors, with the ensuing lack of consensus stalling efforts to advance remote sales tax legislation.  For his part, Senate Majority Leader Mitch McConnell (R-KY) has pledged to hold a vote on MFA – or a similar proposal – later this year.  It should be noted that the Senate in 2013 approved an earlier iteration of MFA, but the measure was never considered in the House.  Therefore, the upper chamber will likely yield to the House this year.  While CSAC and other MFA supporters continue to have concerns with the latest Goodlatte proposal, the discussion draft has no doubt breathed new life into this longstanding debate.