As reported by the National Journal, on December 3, 2014, Speaker of the House John Boehner made it clear in a closed-door meeting that the House of Representatives would not vote on the Marketplace Fairness Act of 2013 (pdf) before the current session of Congress adjourns (the current session of Congress is expected to adjourn on or before January 3, 2015). According to the report, Speaker Boehner held this meeting with up to 30 Republican members of the House who are pushing for a vote on the Act during the lame duck session of Congress. Also according to the report, the Speaker promised that the House would revisit this issue next year, assuming that the Act is reintroduced in the next Congress.
The Marketplace Fairness Act would allow states that adopt simplification and uniformity measures with respect to their sales and use taxes, such as by joining the Streamlined Sales and Use Tax Agreement, to require certain vendors that do not have a physical presence in the state (“remote vendors”) to collect and remit sales and use taxes owed by consumers who purchase taxable items from a remote vendor. The Act passed the Senate with broad, bipartisan support by a vote of 69 – 27 on May 6, 2013, but it has stalled in the House. The Bond Buyer on December 4, 2013 ($) reported that Senator Mike Enzi, who sponsored the Act in the Senate, has called for groups who support the Act, including state and local governments who have lost significant sales and use tax revenue since the explosion of online commerce, to “bust myths” that have developed about the Act. The Public Finance Tax Blog has decided to answer Senator Enzi’s call.
Myth 1: The Act Imposes a New Internet Sales Tax.
Why has the Act failed to advance in the House? As Senator Enzi has observed, several myths have been developed in opposition to the Act. The primary, and most pernicious, of these myths is that online purchases from a remote vendor are not currently subject to sales or use tax in the customer’s state and, thus, the Act would impose a new “internet sales tax” on such purchases. This contention has been made by Americans for Tax Reform (the group founded and headed by Grover Norquist), Freedom Works, and (are you sitting down?) the Wall Street Journal ($), and it holds considerable sway with conservative Republicans in the House of Representatives.
The response to this myth cannot be overstated – with the exception of customers who live in states that do not have sales and use taxes (i.e., Alaska, Delaware, Montana, New Hampshire, and Oregon) all on-line purchases are subject to either sales tax or use tax in the customer’s state. The use tax, which is imposed on a customer’s use, storage or consumption of property in the taxing state, compensates for the absence of the sales tax, which is imposed on retail sales made in the taxing state, in those instances where the sales tax cannot be levied. One such instance is on-line sales, where the seller and the customer are in different states and, thus, there is no sale in the customer’s state that is subject to that state’s sales tax. The customer, however, unquestionably has an obligation to pay the compensating use tax, which is imposed by the customer’s state at the same rate as the sales tax, for the customer’s use, storage or consumption of the item purchased from the remote vendor.
The problem with the use tax is that it is extremely difficult for the taxing state to enforce, unless it involves an item that must be registered to be used in the taxing state, such as an automobile, watercraft, or aircraft. For example, if a resident of Pennsylvania thought he could avoid sales tax on the purchase of his next car by buying the car in Delaware, he would be in for a rude awakening when he registered the car in his home state of Pennsylvania. At the time of registration, Pennsylvania would demand the payment of Pennsylvania use tax or proof that an equivalent amount of sales tax had been paid in the state where the car was purchased. Because Delaware has no sales or use taxes, the Pennsylvania resident would have to pay the full amount of Pennsylvania use tax when he registered the car in Pennsylvania.
Such an enforcement mechanism for use tax does not exist for other out-of-state purchases – for example, those of rare B-sides by noted jazz flautist James Newton (particularly those sampled by the Beastie Boys). The Pennsylvania resident who decides to do his holiday shopping in Delaware will not pay sales tax on the purchase of his gifts, and he can rest assured that the Pennsylvania Department of Revenue will not audit his holiday gift purchases to ensure compliance with Pennsylvania’s use tax. Multiply this by over a billion dollars and you have a sense of how, beginning each Black Friday, the myth of sales and use tax-free internet shopping drains the customer base of local merchants and the tax base of state and local governments. DISCLAIMER I – The Public Finance Tax Blog refuses to countenance the commencement of the holiday shopping season on or before Thanksgiving. DISCLAIMER II – The Public Finance Tax Blog is not saying that Santa Claus is a myth, but we advise that you do your own holiday shopping on the off chance that he is.
To repeat, because this literally cannot be overstated, unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, there is no such thing as an internet purchase that is free of the use tax. The only question is whether the customer will assume that his failure to pay the use tax will in all likelihood go undetected, or whether the remote vendor will instead be obligated to collect and remit the tax and, thus, not enable the customer’s tax evasion. The prevention of tax evasion is precisely why states require in-state merchants to collect and remit the sales tax owed by their customers. If the state relied on the customers to pay directly to the state the sales tax they owed on purchases from in-state merchants, the sales tax would rarely be paid. We know this because customers rarely pay their use taxes, which are the corollary to sales taxes (if customers paid their use taxes, there would be no need for the Marketplace Fairness Act and, hence, this post. Stop snickering).
Myth 2: The Act Would Saddle the Smallest of Remote Vendors with Crushing Compliance Burdens.
The second myth is that the Marketplace Fairness Act would crush every remote vendor, even those making only one remote sale, under a mountain of tax compliance and return preparation for the more than 10,000 jurisdictions that impose a sales tax (see linked materials, above, from Americans for Tax Reform and Freedom Works).
The concern that remote vendors, who lack physical presence in the states to which they sell their goods, would have to deal with a dizzying array of use tax bases, rates, and exemptions if they were obligated to collect and remit use tax on purchases made by their customers was a rationale given by the United States Supreme Court in its decision in National Bellas Hess, Inc. v. Illinois, 386 U.S. 753 (1967), that, under the Commerce Clause of the United States Constitution, states can impose a duty to collect and remit sales and use taxes only on vendors who have a physical presence in the state.
Although its Commerce Clause jurisprudence had evolved after the decision in National Bellas Hess away from bright-line tests like the physical presence requirement, the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), recognized the importance of the substantial mail-order industry that had developed since National Bellas Hess. Mail-order businesses had assumed that they were not required to collect and remit sales or use taxes in states where they had no physical presence, in reliance on National Bellas Hess. In adherence to stare decisis, and recognizing the fact that the mail-order industry had relied on National Bellas Hess in this way, the Supreme Court in Quill affirmed the physical presence requirement for substantial nexus under the Commerce Clause for purposes of a requirement to collect and remit sales and use taxes. The Supreme Court in Quill also observed that Congress has plenary power under the Commerce Clause and that Congress could, under that power, reach a different conclusion as to what constitutes substantial nexus for purposes of sales and use taxes.
The Marketplace Fairness Act is an effort to exercise this power, and it reflects the fact that careful administration and modern technology have mooted the concerns originally raised by the Supreme Court in National Bellas Hess, though those concerns were certainly legitimate at the time. First, for a state to compel a remote vendor to collect and remit that state’s use tax, the state must either join the Streamlined Sales and Use Tax Agreement or enact simplifying legislation similar to the Agreement that harmonizes the state and local sales and use tax bases in the state and that provides for a single sales and use tax return to be filed by remote vendors with the state entity that will administer all state and local use taxes with respect to remote vendors. In other words, the Act would harmonize the disparate use tax bases and provide for a single use tax return to be filed by a remote vendor with the applicable state in which the vendor has customers. The Act would not subject remote vendors to thousands of tax bases and thousands of returns to be filed with each jurisdiction that imposes sales and use taxes.
Moreover, the Act requires that each state provide remote vendors with software to calculate the use tax that must be collected and remitted in respect of the remote vender’s sales to customers in that state. This type of software did not exist in 1967 or 1992 when the Supreme Court grappled with these issues, and it makes use tax collection and remission calculations administrable for remote vendors. Finally, the Act would exempt each year from the obligation to collect and remit use taxes those remote vendors who did not in the previous year have more than $1,000,000 in aggregate remote sales in the United States. Thus, a remote vendor who makes only one remote sale would be subject to use tax collection and remittance obligations under the Act only if that sale was for more than $1,000,000. So, our readers who are planning to sell their homemade cuddly kitten calendars on eBay this holiday season can be of good cheer: it would take sales far in excess of even the rosiest kitten calendar market forecasts to reach the threshold.
Myth 3: Remote Vendors Receive No Benefits from Services Provided by State and Local Governments in Marketplace Jurisdictions.
The third myth is that because remote vendors lack a physical presence in the states where their customers reside, remote vendors obtain no benefits from the services provided by these states and their political subdivisions (pdf). Yes, remote vendors obtain no benefit from destination states and political subdivisions into which they make sales, other than public school systems that produce educated residents to purchase the remote vendor’s goods, public transportation infrastructure and police and fire protection services for the efficient and safe delivery of the remote vendor’s goods, and courts where a remote vendor can seek redress from a recalcitrant customer. Other than these services, which are of minimal importance to a remote vendor’s ability to transact business, the destination states have provided nothing to remote vendors and these vendors should therefore have no obligation to collect and remit use tax on purchases made by their customers. Mmmhmmm.
Myth 4: Remote Vendors Should not be Tax Collectors for the Marketplace Jurisdictions.
The final myth, brought to you by none other than Senator Kelly Ayotte (R – NH), among others, is that a remote vendor should not be obligated to act as a tax collector for jurisdictions in which the remote vendor has no physical presence, particularly if the remote vendor operates from a state that does not have sales or use taxes, such as New Hampshire. The response to this myth is simply put – if a remote vendor does not want to incur obligations associated with the geographic market it is exploiting, it should not sell to customers in that market. Local merchants must collect and remit sales tax from their customers, and there is no good policy reason why their on-line competitors should not have the same obligation with respect to use taxes. Excusing remote vendors from this collection and remittance obligation affords them an inherent pricing advantage and amounts to government interference in the market in favor of the remote vendors. Moreover, as a former prosecutor such as Senator Ayotte would no doubt agree, a person who chooses to transact business outside of his home jurisdiction must comply with the laws of the marketplace jurisdiction, even if they differ from those of the home jurisdiction.
It should be noted that not all conservatives oppose the Marketplace Fairness Act. Arthur Laffer argues, for many of the reasons stated above (pdf), that the Act should be enacted into law. He also posits that the increased revenue from use tax collection would allow states to decrease their marginal income tax rates. The wisdom of shifting from income taxes to consumption taxes is a topic for another day, but Mr. Laffer’s principled, and myth-busting, support of the Marketplace Fairness Act is laudable.