Equally Equal: Why the New Internet Sales Tax Bill Works
For more than a decade, the US sales tax system has made e-retailers âmore equalâ than their brick-and-mortar peers. E-commerce accounted for just 7 percent of total retail sales in the first quarter of 2015, yet the Internet remains a duty-free zone for these privileged few businesses that don't collect taxes on goods sold outside their home states.
A new bill, HR 2775, the Remote Transactions Parity Act, would finally close this tax haven but still spare e-retailers from the headaches of collecting and reporting sales taxes.
Introduced on June 15 by Rep. Jason Chaffetz (R-UT) and bipartisan co-sponsors, the Remote Transactions Parity Act is the House of Representatives' answer to the Marketplace Fairness Act, passed by the Senate in May 2013. Though viciously contested, the Marketplace Fairness Act is a well-conceived bill that would achieve sales tax parity for online and offline sellers. Arguably, the Remote Transactions Parity Act is an improvement upon the Marketplace Fairness Act and one that will better protect the interests of e-retailers.
Critics of the Marketplace Fairness Act have argued that sales tax obligations would place an âundueâ burden on small businesses that would struggle to comply with the tax rules of more than 10,000 local jurisdictions. This argument is based on the 1992 US Supreme Court case Quill Corp. v. North Dakota, in which the court ruled that remote sellers do not have to collect and remit local sales taxes unless they have nexus in the state where the customer lives.
One of the foundations of this argument, namely the difficulty of tracking and remitting taxes to so many tax agencies, no longer holds up thanks to software that can automatically complete tax calculations and collection compliance tasks. The Remote Transactions Parity Act acknowledges this reality while protecting the most vulnerable e-retailers as they transition to collecting sales taxes.
Under the Marketplace Fairness Act, all sellers generating less than $1 million would be exempted from collecting sales tax. This could have turned into a loophole. Rep. Bob Goodlatte (R-VA), chairman of the House Judiciary Committee, raised this concern during the Marketplace Fairness Act debates and argued that any e-commerce taxation bill should make sure that businesses of all sizes are able to comply.
The Remote Transactions Parity Act addresses Goodlatte's critique by providing more generous exemptions but phasing them out over a three-year period. In the first year, e-retailers generating less than $10 million are exempt. The maximum drops to $5 million and $1 million in the second and third years, respectively. Beginning in the fourth year, all e-retailers are obligated to collect sales tax. Under this system, it will be much harder to find a loophole.
Like in the Marketplace Fairness Act, sales tax technology is to be provided by commercial companies and paid for by the states under the Remote Transactions Parity Act. However, in the new bill, the states are required to certify multiple software providers, which, in turn, must be approved to operate in all states that decide to collect sales tax from remote sellers [Full disclosure: My company Exactor is one of these certified vendors].
The Remote Transactions Parity Act's certification system guarantees that a) tax automation software will be proven to work as promised before e-retailers sign on, and b) sellers will be able to choose the tax software that best fits their business. Companies have been automating sales tax for nearly a decade, so there will be a competitive marketplace of providers. The system has been tried and tested. It works equally well for small and large businesses.
Compared to the Marketplace Fairness Act, the Remote Transactions Parity Act takes stronger steps to protect sellers from the burden of an audit. States are barred from auditing sellers with revenue under $5 million unless there is suspicion of intentional misconduct. In the event of an audit, the burden of proof and associated expenses fall on the software provider, not the seller.
The most common objection to the Remote Transactions Parity Act will be the usual tune from a broken record player: Won't it hurt business? Once again, the peanut gallery may quote The Amazon Tax: Empirical Evidence from Amazon and Main Street Retailers, a research paper that tracked the effects of imposing sales tax on e-retailers.
The researchers found that households living in California, New Jersey, Pennsylvania, Texas, and Virginia reduced their Amazon spending by 9.5 percent after those states subjected e-retailers to remitting sales taxes. At the same time, these households increased spending at local brick-and-mortar retailers by 2 percent and spent 19.8 percent more with other online retailers. In other words, the âAmazon taxâ did not reduce online commerce in general; total spending with e-retailers increased.
Twenty-three years ago, at the time of Quill Corp. v. North Dakota, the US tax system simply wasn't ready to accommodate online merchants that sell across thousands of tax jurisdictions, each with their own peculiar rules and filing requirements. Today, that is no longer an obstacle â technology has caught up to commerce, and e-retailers can meet the same tax obligations as brick-and-mortar stores.
Even the Supreme Court, in this year's matter of Direct Marketing Association v. Brohl, had extended a de facto invitation for someone to submit a case that would be used to revisit the original Quill holding. Justice Anthony Kennedy, who sat on the original Quill panel, wrote in his opinion that ââ¦ it is unwise to delay any longer a reconsideration of the court's holding in Quill. A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier.â
Chaffetz's Remote Transactions Parity Act is so far the best proposal to eliminate the e-commerce tax haven and reverse the harm that Quill has caused. It's time that Congress make online and offline sellers âequallyâ equal.
About the author:
Jonathan Barsade is the CEO of Exactor, which provides solutions to help companies with sales tax compliance.