FedTax Statement for the Record to the House of Representatives Committee on the Judiciary Hearing: Exploring Alternative Solutions on the Internet Sales Tax Issue

March 18, 2014

Download This Statement via FedTax Judiciary Committee Statement 031214

Introduction

Chairman Goodlatte, Ranking Member Conyers, and distinguished members of the Committee on the Judiciary, thank you for the opportunity to submit this Statement for the Record on this hearing, “Exploring Alternative Solutions on the Internet Sales Tax Issue.” Our company, FedTax, is the proud inventor and operator of TaxCloud, a free online sales tax compliance service now being used by approximately 5,000 online retailers of all sizes. TaxCloud is available at no cost to retailers because we are a Certified Service Provider (CSP) for the twenty-four Member States of the Streamlined Sales and Use Tax Agreement (SSUTA). Our company was founded in 2008 by technology executives with decades of experience building some of the most recognizable brands in e-commerce. At our previous companies we experienced firsthand how difficult sales tax compliance can be, and we made it our mission to make sales tax compliance easy for businesses and more efficient for state and local governments. As we have grown, our executive team has expanded to include payments industry executives as well as nationally recognized sales tax and public policy experts.

In his opening remarks, Chairman Goodlatte named several technology-related fears regarding the Marketplace Fairness Act that we are uniquely qualified to address: technical capabilities of the prescribed free software, integration costs related to the free software, concerns for the direct mail industry, and concerns related to additional audit exposure.

We agree that Chairman Goodlatte’s stated concerns are important, and we are convinced that they can (and should) be addressed.

Background

This testimony is not based upon hypothetical notions or unproven theories. Rather, it is informed by our direct experience as a SSUTA CSP since 2010.

A brief background: SSUTA’s goal is to minimize or eliminate the burdens of sales tax compliance for businesses. Since its inception in 1999, it has sought input from state and local governments as well as the business community through regularly scheduled public meetings.

During its first few years, SSUTA stakeholders publicly debated many different sales tax modernization and simplification schemes (a subset of which have been proposed before the committee today). Ultimately, they agreed on an approach that relied upon modern technologies to accommodate the many nuances and variations in sales tax law across state and local governments.

Over the next few years, the SSUTA states developed the Certified Service Provider program, including the policies, practices, and procedures to be employed by each of the participating states to test and verify that a CSP candidate’s software and/or service adhered not only to SSUTA’s rules (including sourcing, taxability, rounding rules, etc.) but also to each state’s statutes. Today, six companies (including ours) have achieved CSP designation. It should also be noted that achieving CSP designation is not a one-time event but an ongoing process; our systems are regularly tested, verified, and audited by the states to maintain our certified status.

During this time, SSUTA stakeholders also worked with the tax technology group TIGERS[1] to develop standard formats for states to provide open source sales tax rate and jurisdictional boundary data for use by the business community. The work with TIGERS also included the specification and adoption of a Simplified Electronic Return (SER), based upon the widely used e-file format.

The current SSUTA Member States represent more than half of the states with sales and use tax laws, including Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

In these SSUTA states, each of the CSPs already manages all aspects of sales tax compliance for their respective retailers. These responsibilities include:

  1. Calculation of applicable sales tax rates (including state, county, city, and special jurisdictions)
  2. Application of any full or partial product-based exemptions
  3. Capturing any available use-based exemptions
  4. Detailed jurisdictional (and sub-jurisdictional) reporting of sales tax collections
  5. Automated, timely filing of sales tax returns
  6. Automated remittance of sales tax proceeds to applicable jurisdictions
  7. Primary response to any jurisdictional audit inquiries

Technical Capabilities

Some have suggested that systems capable of keeping track of the sales tax laws of over 9,600 jurisdictions simply do not exist, or that the technologies necessary to achieve compliance would be prohibitively costly for small businesses. TaxCloud’s direct work with taxpayers refutes these assertions. It doesn’t matter if there are 9,600 or 96,000 jurisdictions; modern e-commerce systems are adept at easily managing such diversity, as Joe Crosby noted in his testimony before the committee. Businesses do not need to spend enormous quantities of time or resources to achieve compliance.

Integration Costs

Even with free software already available, opponents continue to complain that businesses will be burdened with the costs of integrating such software into their existing systems. This line of argument ignores the reality that all but the very largest retailers (and a few retailers who rely on legacy systems) rely upon pre-written software and/or online hosted platforms for e-commerce and order management. Retailers rely upon these systems to avoid the costs of developing, managing, and maintaining such systems on their own, costs that are magnified by the changing nature of e-commerce, which is constantly responding to evolving cyber-crime threats, payments and security industry best-practices, and, yes, even legislative requirements. When their retailer clients need to collect sales tax, platform vendors will provide ways for them to do so, embedded within the platforms that retailers already use.

E-commerce platform vendors are intensely competitive and focused; they take pride in not only complying with evolving requirements but often surpassing them, occasionally with stunning results. For example, much of the cloud computing infrastructure now transforming every corner of the technology sector can be traced to several of the largest e-commerce companies adapting to comply with the Sarbanes Oxley Act of 2002. There is no reason to believe these e-commerce platform vendors will not respond to action by Congress in an equally competitive manner to provide sales tax management services for their clients. In fact, this process is already underway—almost all of the most widely used e-commerce and order management platforms have already adopted and integrated with one or more CSPs.

Direct Mail Concerns

Some direct mail businesses are concerned that they could be required to include within their mail order catalogs a very long insert with every possible sales tax rate in the country. But mail order catalogs are designed to be mailed to their customers, so each customer’s mailing address can be harnessed to solve this problem. Just as the catalog vendor prints each customer’s address on each catalog, there is no reason they couldn’t print the effective sales tax rate for that specific address right on the mailing label!

Leveraging the address block for other customer-specific data is a technique routinely practiced in the direct mail industry today. Most mail order catalogs already print customer-specific Customer Reference or Quick Service Numbers (usually 5 to 9 characters), which the customer conveys to a sales agent when placing a phone order or enters on the website when placing an online order.

Furthermore, most catalog retailers encourage their customers to place their orders online or by phone; many don’t even offer paper ordering forms any longer. Of course, once a customer “channel shifts” from the printed catalog to an online storefront or telephone order, both of these ordering systems can rely upon free software and services provided by the states to determine the correct sales tax rates and even apply any available item-level exemptions.

If a catalog exemption is to be included, it should be carefully crafted so as not to favor catalog retailers over other remote retailers (or local retailers).

Audit Exposure

Another concern is related to the threat of remote state audits. Under the current CSP system, CSPs, not their retailers, are responsible for responding to audit inquiries. In most cases the CSP already has all of the information necessary to respond to such audit requests, without any effort by the retailer. As this committee considers alternatives to deal with audit concerns, one option is to rely upon the integrity of the states’ CSP certification process and shield any retailer relying upon the services of a CSP from remote state audits.

Important Concepts for Alternative Solutions

FedTax believes that the central tenet of any internet sales tax legislation must be a federal framework based upon the current sales tax structure. Anything else would cause an immense disruption to businesses across the nation.

Some witnesses have asserted that SSUTA’s simplifications are insufficient to remove perceived compliance burdens. We would note that the other solutions that were proposed, such as origin sourcing or an “IFTA-like” home-base proposal, create compliance burdens of their own—and if they choose these options, states would be jettisoning a fully developed, functioning system that has been eliminating compliance burdens for 15 years in favor of an untested, hypothetical system that might take years to create and that businesses and consumers have no experience using.

Disruption of existing business processes by changing to a new system will damage the economy and cause needless delays in solving this pressing problem.

Compliance burdens can be eliminated by requiring states with collection authority to provide retailers with automated technology solutions (including software and/or services) that can manage compliance tasks for all states with collection authority, and that are verified and certified by each such state’s revenue agency to ensure compliance with that state’s sales and use tax laws. In addition:

  • Certified systems must be allowed to file sales tax returns and remit sales tax proceeds on behalf of remote retailers.
  • Certification is necessary for states to have the certainty necessary to grant comprehensive liability relief for remote retailers relying upon such systems.
  • States must be required to certify multiple providers to ensure an open and free market.
  • Providers of certified systems must be compensated by the certifying state to eliminate costs for remote retailers. Such compensation should be paid by the states from the remotely collected sales tax proceeds.
  • Retailers’ reimbursement for expenses related to integration and initial setup costs should be paid by the states from the remotely collected sales tax proceeds.
  • States must provide publicly available electronic (machine-readable) data sources for sales and use tax rates, jurisdictional boundaries, and taxability of goods and services. These data sources must be available for all businesses to rely upon, even those not using a certified system.
  • States must allow certified systems to automatically register businesses in their state.
  • States must support a central registration process to allow remote retailers to register easily and quickly in all states.
  • States must make a single statewide agency responsible for accepting sales tax returns and sales tax proceeds.
  • Recognizing the multichannel nature of modern retail, states must be able to accept multiple (nonduplicative) sales tax returns, possibly one per channel.
  • Destination sourcing must be required for interstate sales. Destination-based sourcing returns the tax collected to the customer’s tax jurisdiction.
  • There must be limitations on audits, such as restricting audits to sellers above a certain threshold, or a consolidated audit, or even exempting retailers that use a Certified Service Providers from audits.

The beauty of this proposal is that this system is in already in place today and it is working. The SSUTA system currently provides proven technology solutions for the thousands of retailers that are already collecting today. Some of the other ideas that have been proposed at the hearing have not been tested and are not currently in use. Forcing states and businesses across the country to adopt radically different systems will create disruption and unnecessary expense.

Why should Congress discard the Streamlined Sales Tax Governing Board, which has been perfected over several years, and replace it with a different structure? A simpler answer would be to give collection authority to all states that meet congressionally mandated minimum simplification requirements and require them to provide technology as listed above to reduce compliance burdens.

We know what works. It is not a single rate. It is not origin sourcing, or any of the other alternatives presented at the hearing. They will simply muddle tax reporting further. Inaction by Congress will encourage states to continue attempts to circumvent Quill and find solutions that may or may not benefit the retail community and may or may not further simplification and uniformity.

What won’t work:

  • Origin sourcing. This scheme shortchanges state and local governments by sending their consumers’ tax dollars to other states and countries. It also would turn jurisdictions with no sales tax into e-commerce havens.
  • Requiring reporting instead of remittance. This scheme is burdensome for businesses and would require entirely new systems at revenue departments to process and respond to such reports. This is a highly inefficient way to collect tax that is owed.
  • Reporting remote sales to a clearinghouse for distribution to states. This increases administrative expenses and replaces one bureaucracy with another—such as creating an IFTA for sales tax.
  • Granting states the power to exclude noncompliant retailers rather than having them collect sales tax. States have enough difficulty tracking down in-state sellers that do not collect sales tax; the process of identifying remote sellers that aren’t collecting and then engaging in a legal process to bar them from selling into the state, is unduly lengthy and litigious, not to mention very unfriendly to businesses.

Dramatically changing the way sales tax works is not a solution. It would be a disruption for both businesses and governments and carries unacceptable costs for both.

The issues cited as barriers for business to collecting—fear of audits by states where the retailer has no locations, exorbitant integration costs for “free” software, catalog sellers, and data privacy—are all easily resolved by legislation. For example, limitations on the frequency of audits and dollar thresholds can reduce audit burden or risk. Audits of remote sellers could be performed by the seller’s home state or by a multistate compact. Legislation should clarify that integration costs should be paid by the states.

Conclusion

The simplest, least expensive, and easiest solution is to require remote retailers to collect the sales tax at the destination and provide the technology to do so at no cost.

We urge the committee to draft a bill reflecting these core concepts and report it favorably to the House of Representatives for action in this session of Congress. Your action would reward the years of effort and cooperation between businesses and states to modernize and simplify sales tax collection and administration while eliminating tax compliance burdens.

Mr. Chairman, thank you for the opportunity to submit this Statement for the Record on this important issue.

R. David L. Campbell
Chief Executive Officer
The Federal Tax Authority, LLC


[1] The Tax Information Interchange Task Group of ANSI ASC X12 was formed in 1991, and initially worked with traditional EDI formats. The Task Group produced X12 standard Transaction Set 813, the generic EDI tax filing, which is still in use today in the Motor Fuel and Sales Tax areas. TIGERS began working with XML in December 2000, and issued its first production schema set in 2003.The task group became “TIGERS” in December 1994, with the realization that technical standards were not enough – states and their partners needed guidance and assistance in turning the standards into actively supported electronic commerce programs. The group broadened its scope to include peer reviews of state technical implementations and mappings, guidance in technical infrastructure for e-commerce, and model documentation for the business rules enforced by the state programs.

E-Fairness Solutions Make Online Sales Tax Quick and Easy

March 18, 2014

FYI: For those of you that didn’t already see it, the following Op-Ed piece by our CEO ran in Politico last week.

Online retailers are a tech-savvy bunch. They seem to know what we want, when we want it—and how to get it to us as quickly as possible. But a few of the same companies that have figured out how to target our shopping habits and ship products of all shapes and sizes around the country are now claiming that collecting sales tax is too hard.

These critics of e-fairness legislation have suggested that private-sector software already widely available for collecting sales tax is incomplete, complicated, and expensive. As an e-commerce entrepreneur for almost two decades, and as cofounder and CEO of TaxCloud, one of several online sales tax management services, I’d like to offer the truth about online sales tax.

The same technologies that enable smartphones also make sales tax calculation quick and easy: At TaxCloud, our software works directly with e-commerce platforms to calculate sales tax during each customer’s checkout. Everything needed to figure out the correct tax rate is already present during an online sale: the purchaser’s address, the sales price, and the type of item being purchased. That information is used to calculate the appropriate sales tax in a fraction of a second, just like shipping charges. Don’t be fooled—calculating sales tax is not laborious or burdensome. It’s really quite simple.

Collecting sales tax is not very expensive, either: Software and services that manage sales tax collection aren’t hard to find or expensive; in fact, in some states the service is free. Opponents of an e-fairness solution have made numerous misleading statements about the costs of software, presumably to preserve the preferential treatment they currently enjoy in the tax code. For instance, while publicly railing against the expense associated with online sales tax, eBay actually features a sales tax utility on its own website that costs $15 per month. And many third-party online storefronts or marketplaces can handle sales tax collection for their merchants for a very small fee. The cost of software is simply not an impediment for small online sellers.

Set it and forget it—why software makes it easy: It’s true that any sales tax system will need to know the type of item being purchased in order to determine if it’s tax-exempt. It’s important to remember that bricks-and-mortar sellers have always been required to assign tax classifications to their wares—this is not a new concept or obligation. And here again, the rhetoric does not match reality.

First, most small online stores tend to be specialists—they’re more likely to be selling one class of products than a wide range—and if that’s the case, all a seller needs to do is set their entire store to one tax category. Click—done. Second, even if a small online retailer sells many kinds of items, they would only need to assign categories to tax-exempt items, a small subset of most stores’ inventories. Click, click—done. E-commerce platforms are designed to assign large groups of items to tax categories, so no online seller will spend their time worrying about whether an item is tax-exempt or not. The bottom line is that once these categories are set, online retailers can focus on serving their customers—not on tax collection.

Tax returns aren’t filed by horse and buggy anymore. Despite the oft-repeated claim that compiling and filing sales tax returns with multiple states will create huge burdens and audit risks, the fact is that all of the existing sales tax management services can take this task off an online retailer’s hands entirely. Agreements with individual states let these services handle filing returns and remitting tax proceeds, without any effort from the retailer themselves. Most of these services also store all returns associated with your account, so accessing past records is a breeze.

Twenty years ago, opponents of remote or online sales tax collection were correct—collecting sales tax was rather laborious and time-consuming. But the same burst in technology that now allows consumers to shop anywhere, anytime, and have whatever they want delivered to their door in under twenty-four hours, also makes charging sales tax remarkably simple. For online stores, collecting sales tax is easier than configuring shipping charges. “Doom and gloom” predictions about the technology are misplaced—and any suggestion that sales tax management systems don’t already exist is simply wrong.

If Congress believes that online retailers should be exempt from the same laws and tax policies that every other business complies with, that is of course their right. But they shouldn’t make that determination based on the misguided and misleading rhetoric spun by those who stand to benefit from special treatment. And if Congress chooses to end the current disparity and treat all retailers equally, rest assured that the free market has already developed the tools and software necessary for both online sellers and brick-and-mortar retailers to thrive and grow in the decades ahead.


Eliminating the costs associated with online sales tax

July 25, 2013
TaxCloud

TaxCloud: Sales Tax at the Speed of Commerce

One of the most frequent concerns we hear from online retailers about collecting sales tax is that it will simply be too costly. We’ve heard estimates that range up to $400,000 per year—which is insane. We don’t think that anyone should have to spend that kind of money simply to collect sales tax.

In fact, we don’t think that anyone should have to spend money to collect sales tax, full stop. That’s why we created TaxCloud, to give online retailers a free way to manage sales tax. Instead of charging to use TaxCloud, we receive a commission from states based on the amount of sales tax we help retailers collect.

That’s also why the Marketplace Fairness Act requires states to provide free sales tax software for retailers.

But even with the promise of free sales tax software and services, concerns about costs remain. Nothing is really free, the argument goes; there must be hidden costs somewhere.

So let’s look at the most common arguments we hear on why collecting sales tax online would be too expensive.

Keep in mind, we can only speak to how TaxCloud works, so all the information here pertains to TaxCloud and not to any other sales tax management software or service.

Training employees to use sales tax software is costly and time-consuming. TaxCloud was designed to be easy for anyone to use. From registration to going live takes as little twenty minutes. What’s more, once TaxCloud is activated for a store, there’s next to no upkeep. If we’re filing the store’s sales tax returns, we ask that they review their returns once a month. Other than that, retailers don’t need to think about it—they can just set it up and forget it. There’s no training involved, and anyone who can manage an online store won’t have any trouble using TaxCloud.

Necessary software upgrades cost money. Because TaxCloud is a real-time web service, not software that’s uploaded or downloaded, there are no upgrades. Tax rates are updated and new features are added behind the scenes, so retailers see those results automatically, without doing anything extra. And as always, there’s no charge for the service at all.

It’s too expensive to hire developers to set up software to work with existing systems. TaxCloud is integrated directly with the e-commerce platforms that most online retailers use to run their shops. That means that our developers work with the platform’s developers to make TaxCloud available to users. Retailers using e-commerce platforms that are integrated with TaxCloud don’t need to hire their own developers. If your e-commerce platform doesn’t support TaxCloud yet, then call them and ask when TaxCloud will be available—TaxCloud is free for platforms as well.

We’d have to hire an accounting staff just to keep track of everything. This is the beauty of sales tax management services: It’s all automated. There’s no need to calculate anything, or look up sales tax rates, or fill out sales tax returns, or even write a check to remit the sales tax that’s been collected. TaxCloud handles all of that.

We completely agree that there shouldn’t be any compliance costs associated with online sales tax, and we’ve worked hard to create a free service that handles every aspect of sales tax for retailers. Cost simply shouldn’t be a factor, and with TaxCloud, it isn’t.


When online sales tax means less income tax

July 18, 2013
Art Laffer

Art Laffer

Today’s issue of USA Today has an interesting piece by Art Laffer on how changes to the tax code can lead to economic growth. His main suggestion? Close the online sales tax loophole.

He writes:

Because state sales taxes generally have fewer loopholes and lower rates — and therefore have a lesser impact on growth and employment — pro-growth policies should favor sales over income taxes where possible.

The governors of Wisconsin, Iowa, Maine, and Ohio are already planning to put this idea into action.

If the Marketplace Fairness Act passes and these states are allowed to require online retailers to collect sales tax, the governors say, they’ll cut income taxes by an equal amount. So if online sales tax generates, say, $1 million in revenue, the cut in income taxes will equal $1 million in revenue.

There are multiple benefits to this approach, for both small businesses and taxpayers. First, it helps out the mom-and-pop businesses on Main Street, which are having a hard time competing with online retailers who don’t have to collect sales tax. The Marketplace Fairness Act levels the playing field by requiring all retailers to play by the same tax rules.

At the same time, it’s a win for taxpayers, who won’t see any increases in their overall tax bills.

For those who worry that enforcement of online sales tax will lead to more government spending as state and local governments see tax revenue rise, there’s another benefit: Since these states won’t see an overall change in their tax revenue, there’s no opportunity for increased spending.

And Laffer offers solid statistics on how online sales tax will help grow the economy:

Gross state product would increase from 1.2% in Alaska to 4.6% in Washington state over 10 years. States would see jobs created, anywhere from about 2,000 in Vermont to more than 180,000 in California. Gross domestic product would grow by more than $563 billion, creating 1.5 million jobs nationwide.

We think this idea is a win for everyone, especially in more conservative states that want to support local small businesses and avoid more government spending at the same time.

Of course, it’s dependent on the passage of the Marketplace Fairness Act. We hope that Congress—especially the representatives from Wisconsin, Iowa, Maine, and Ohio—is listening.


How sales tax management services handle audits

July 8, 2013

Congress is currently considering legislation to allow states to require online retailers to collect sales taxes. The bill that was passed by the Senate in May, the Marketplace Fairness Act, has raised concerns about how it could affect the way businesses are audited.

At TaxCloud, we handle not only sales tax calculation and collection but also filing and audits for many of our merchants. While we don’t know exactly what future legislation may say about audits, here’s what our experience dealing with audits has been like.

First, a little background: The 24 states that have designated us a Certified Service Provider (CSP) have agreed not to hold our merchants liable for any tax calculation errors, and in the event of an audit, these states deal first and primarily with us, not the business itself. So how does this work?

When one of our merchants is audited, the state begins by contacting us. We act as the intermediary between the state and the merchant. The state lets us know that it will be reviewing the merchant’s transactions and conducting an audit beginning on a particular date, and we in turn notify the seller.

The merchant doesn’t need to provide any additional information at this point, as long as we have complete transaction data. If there is transaction data that we don’t have, the merchant needs to supply it.

During the audit, the state sends any information or document requests directly to us. Occasionally we may need the seller’s help to respond. For instance, if an item was classified as tax-exempt but it’s not clear in the transaction records exactly what the item is, we’d ask the seller to provide a description of the item. The state contacts the merchant directly only if there is evidence of fraud.

If future legislation follows this pattern for audits, it’s good news for businesses: It means that states will go to sales tax management services for data that businesses have traditionally had to supply, so businesses won’t be faced with hosting an audit.


OH Gov. Kasich vetoes state online sales tax in favor of federal legislation

July 3, 2013
boehner-kasich1

Ohio Governor John Kasich (L) with Speaker of the House John Boehner

On Sunday, Ohio Governor John Kasich vetoed a line item in the state budget that would have required online sellers to collect sales tax from Ohio residents. His reasoning? He believes Congress needs to act on the issue first.

Governor Kasich isn’t the first lawmaker to voice that opinion—most state legislators seem to agree that the best scenario for everyone is that Congress, not states, revise the rules of online sales tax. But since Congress has yet to act, many states have begun instituting their own online sales tax laws like the one Governor Kasich vetoed.

State laws on the issue are, by necessity, more complex than a federal law would be, which can create problems for online businesses, particularly marketing affiliates.

Although we certainly sympathize with states that want to be able to enforce their own sales tax laws, we agree with Governor Kasich that Congress is the right place for online sales tax to be addressed. Here’s hoping the House of Representatives follows the lead of the Senate and takes it up soon.


Members of Congress, National Governors Association, and small businesses speak in support of online sales tax

June 24, 2013

At a press conference last Wednesday, Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) and National Governors Association Executive Director Dan Crippen spoke about internet sales tax.

Womack and Speier are strong supporters of federal legislation that would allow states to require online retailers to collect sales tax. Womack responded to opponents who say that enforcing a tax that usually goes unpaid amounts to creating a new tax: “You have to wonder, is avoiding or ignoring the law the leg on which you want to base your argument?” Said Crippen, “It’s no more a new tax than if you hadn’t been paying your property taxes, then suddenly you’re on the rolls and you start paying your property taxes.”

Also in attendance was Andrew DeMoss, senior accountant at Simms Fishing Products in Montana, who spoke to the concerns of small businesses that collecting sales tax online could be difficult. The company recently began collecting sales tax in its online store using sales tax software. “If we can do it, anyone can do it,” he said.

In May, the Senate voted overwhelmingly in support of the Marketplace Fairness Act, a bill that would allow states to require internet retailers to collect sales tax. The issue is now with the House of Representatives.


Follow

Get every new post delivered to your Inbox.

Join 839 other followers