“Fair Is Fair”: A legal perspective on the Marketplace Acts

September 11, 2012

The latest issue of Shopping Center Legal Update, a “legal journal for the shopping center industry,” has an interesting article on the Marketplace Fairness Act, Marketplace Equity Act, and Main Street Fairness Act—the three bills currently before Congress that would each allow states to require online retailers to collect sales tax.

In the article, Brian D. Huben, a partner at the LA law firm Katten Muchin Rosenman LLP, provides a legal perspective on online sales tax collection. We were particularly interested in his analysis of the Supreme Court case Quill Corp. v. North Dakota (1992). That case is responsible for the current rules about sales tax that govern online shopping, and this is the first place we’ve seen its details explained by a legal expert.

We found this part of the article, which quotes the dissenting opinion in Quill, particularly enlightening:

Some say that the past is prologue. Justice Byron Raymond “Whizzer” White, who dissented in Quill, presciently noted that “an out-of-state seller in a neighboring State could be the dominant business in the putative taxing State, creating the greatest infrastructure burdens and undercutting the State’s home companies by its comparative price advantage in selling products free of use taxes, and yet not have to collect such taxes if it lacks a physical presence in the taxing State.” Quill Corp., 504 U.S. at 328 – 329. While the stakes in Quill were decidedly smaller, the $23 billion in uncollected sales and use tax revenue cannot be ignored.

While fairly brief, this article is a great source for those interested in today’s online sales tax rules, how they came to be, and why some are arguing for change.


Our hearts are racing (for internet sales tax collection)!

July 26, 2012

As most of our readers are no doubt aware, changes have been happening fast for online sales tax collection. Here are the basics you need to know:

  • A few days ago, the House Judiciary Committee held a hearing on the Marketplace Equity Act (H.R. 3179). Several members of Congress, both Democrat and Republican, testified at the hearing in support of the bill, and an article in the Wall Street Journal proclaimed that “the hearing revealed that a large number of lawmakers had moved beyond the question of the legitimacy of collecting online sales taxes and were focused on how to avoid making the process overly burdensome.” (We have the answer, of course: services such as TaxCloud, which take the cost and complexity out of collecting sales tax online.)
  • Meanwhile, the Senate bill on the same issue, the Marketplace Fairness Act (S.1832), will be the subject of a hearing before the Senate Committee on Commerce, Science, and Transportation next week on August 1.
  • Also, New Jersey Governor Chris Christie has joined the list of Republican lawmakers who support federal online sales tax legislation. He also made a deal with Amazon for the company to begin collecting sales tax on purchases made by New Jersey residents in July 2013, in exchange for which the company will build two new distribution centers in the state. Since Christie is one of the leaders of the Republican party—he is frequently mentioned as a potential vice-presidential candidate—we hope this will put an end to the divisive rhetoric that only Democrats support online sales tax collection.
  • Another sign of the momentum that federal legislation is gathering, news articles on online sales tax collection are proliferating everywhere. A few we recommend:

Retailers, lawmakers revive call for Internet sales tax, MSNBC/CNBC, July 26

Online sales tax effort gains traction at US House hearing, Wall Street Journal, July 24

Proposed online sales tax gaining momentum and foes, FOXBusiness, July 24

Supporters of online sales tax say it’s good for consumers, PC World, July 24

Online sales tax is coming!Wall Street Journal, July 21

Pass the online sales tax! The Washington Post Editorial Board, July 16

Tax break nears end for online shoppersWall Street Journal, July 16 NOTE: FRONT PAGE

States, Congress rallying for an e-sales taxWashington Post, July 8 NOTE: FRONT PAGE

Our opinion: If the bipartisan momentum and support for online sales tax collection continues at the current pace, this issue could provoke a seemingly extraordinary achievement: that Congress can get something done, even in an election year!

This legislation is good for consumers, state and local governments, and businesses. Opponents (primarily eBay) claim the legislation will hurt businesses, but their argument ignores the actual substance of the proposed legislation. The Marketplace Fairness Act S.1832 (and the Marketplace Equity Act H.R.3179) require that states simplify and standardize their sales tax systems and they must provide the software (or services) for retailers to easily comply. We strongly support action by Congress on this issue.


FedTax Statement Submitted for the Record of the Senate Finance Committee (in support of Marketplace Fairness Act)

April 26, 2012

[Download PDF of FedTax Statement]

Statement Submitted for the Record to

The United States Senate Committee on Finance

Full Committee Hearing

Tax Reform and What It Means for

State and Local Tax and Fiscal Policy

April 25, 2012

 Dirksen Senate Office Building

Washington, DC 20510-6200

Attn:  Editorial and Document Section

Rm. SD-219

Statement submitted by

R. David L. Campbell[i]

Chief Executive Officer

and

Joan Wagnon[ii]

Executive Vice President

The Federal Tax Authority, LLC

162 East Avenue

Norwalk, CT. 06851-5715

Alexander Hamilton wrote in The Federalist in 1788 that “individual States should possess an independent and uncontrollable authority to raise their own revenues for the support of their own wants.”

Today the discussion about state sovereignty over matters of taxation continues unabated. State revenue directors have seen firsthand how the actions of the federal government have affected state and local revenues. Members of Congress are increasingly bombarded by requests for action because state laws are restrictive to business or seen as unfair. There are any numbers of examples where congressional action has been beneficial or harmful to states.

But the issue that has been most devastating to state and local government has resulted from Congressional inaction, rather than action: the failure of Congress to overturn Quill v North Dakota.[iii] 

The Marketplace Fairness Act (MFA), S. 1832, sponsored by a bipartisan group of senators (Enzi, Durbin, Alexander, et. al.) is a good solution to the revenue problems of states, but more importantly, it gives states a better mechanism than they have now to collect the taxes they already levy.[iv]

The MFA also corrects a growing imbalance between groups of retailers. Under the current court ruling, tax is collected on some sales and not on other sales of the exact same items. Why should tax be collected on a book or camera purchased from a local business and not on an identical item purchased from a mail order or internet business?

Remote sales are growing at double digit rates.[v] However, states’ inability to collect sales tax on these sales results in the erosion of the states’ tax bases. Certainly this unfairness is not the hallmark of good tax policy! Congress is creating winners and losers among the retail community by its inaction.

Opponents cite two specific reasons for allowing this unfair situation to continue: a) that remote collection would be overly burdensome and complex, and b) that any systems necessary for remote collection would be prohibitively costly. This testimony will provide technical information for Congress to consider when evaluating those arguments.

I.       The Complexity Argument

Technology has advanced considerably since the 1967 and 1992 Supreme Court rulings that created the current sales tax situation. Even the more recent of these, Quill, occurred before the first graphical browser was invented, before most homes had internet connections, and long before e-commerce forever changed the retail landscape. Today, forty-five years after Bellas Hess and twenty years after Quill, online marketplaces and auction sites easily manage millions of items for sale at any given moment.

Today, keeping track of a few thousand local tax rates and filing requirements is not an insurmountable technical, administrative, or financial burden. TaxCloud, the sales tax management system created by FedTax, proves this point by calculating and collecting sales tax on any purchase for any tax jurisdiction in the United States in less than one second. The service is free to all retailers.

The technologies necessary to create such a system are not new; they are well-established. In fact, they are currently being used throughout e-commerce. They are Application Programming Interfaces and Web Services. An Application Programming Interface (API) allows dissimilar and unrelated systems to communicate with each other using pre-established syntax and structure. Web Services allow APIs to be used for machine-to-machine interactions over the internet. Both are now commonly used in e-commerce—for example, in real-time-shipping, which allows a retailer to provide its customers with accurate, real-time quotes for shipping costs based on at least five variables, including weight, size, delivery speed, origin, and destination. Often customers can even compare shipping costs among multiple shippers.

With APIs, Web Services, and other technological advances of the past twenty years, it is now possible for remote retailers to easily keep track of every state’s tax laws. 

To minimize or completely eliminate the undue burdens cited in Bellas Hess and Quill, more than half of the states with sales tax have worked together for twelve years to create the Streamlined Sales and Use Tax Agreement (SSUTA). These states provide free rates and boundaries databases for all of their respective taxing jurisdictions, and regularly issue updates when rules, rates, or boundaries change. In addition these states also certify and pay for software and service providers to manage sales tax compliance on behalf of retailers.[vi] The Marketplace Fairness Act requires that any states seeking remote collection authority shall comply with SSUTA or provide comparable rates and boundaries information as well as certified software and services that retailers can rely upon to achieve compliance with minimal burden.[vii]

Ironically, those who argue most strenuously that remote collection would be too complex are a few large online businesses that already rely on these same technologies every day, in every transaction. The plain fact is that online retailers operate the largest marketplaces in the world by relying on technology to simplify and automate a host of historically burdensome chores, including payment automation, location-specific marketing, personalized recommendations, and even Duties and Value Added Tax management for foreign governments.

II.        The Costs-of-Compliance or Undue Burden Argument

Opponents also argue that even if technology can solve the technical burden of keeping track of rates, jurisdictions, and filing complexities, such software would be prohibitively costly, particularly for small businesses. TaxCloud is provided to retailers at no cost—so the argument that such software would be prohibitively costly should be flatly disregarded. However, the costs-of-compliance argument also maintains that even if the software is free, businesses will still be burdened with the cost of integrating such software into their existing systems.

This line of argument ignores the reality that all but the very largest retailers 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. It is no secret that e-commerce is constantly changing to respond to evolving cyber-crime threats, payments and security industry best-practices, and, yes, 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. Most platforms already provide basic sales tax management features for their clients. Upon enactment of MFA, these existing systems will quickly be adapted to ensure compliance.

To conclude, modern technology has made it easy for retailers to collect sales tax for any state in the U.S. TaxCloud enables retailers of any size to easily collect sales tax and comply with the provisions of The Marketplace Fairness Act—for free. More information is available at TaxCloud.net.

And in addition to TaxCloud, five other companies are certified by the Streamlined Sales Tax Governing Board and ready to assist when Congress authorizes collection—and no doubt hundreds more will emerge soon after legislation is passed, because the free-market system will provide the incentive for entrepreneurs and innovators to develop these products.

Please don’t wait to enact the Marketplace Fairness Act until all the parts of tax reform are in place. Passing this one bill can be the foundation for future reform as well as provide great benefit to both state and local governments. It also benefits brick and mortar retailers. Creating the same tax collection system for retailers whether they sell online or in a store is only fair.

/R. David L. Campbell/
R. David L. Campbell
Chief Executive Officer
/Joan Wagnon/
Joan Wagnon
Executive Vice President

[Download PDF of FedTax Senate Finance Committee Statement – 4/25/2012]


[i] David Campbell, Chief Executive Officer of The Federal Tax Authority (FedTax), founded the company in 2008. FedTax is a Washington State Limited Liability Company with operations in Washington, Connecticut, and Kansas.  Its management team includes highly experienced professionals who have been directly involved in building some of the most recognizable brands in e-commerce, including MasterCard, Google, WebMD, Microsoft, Expedia, and American Express.

[ii] Joan Wagnon served as Secretary of Revenue in Kansas from 2003 to 2011. She also chaired the Streamlined Sales Tax Governing Board in 2008-9 and the Multistate Tax Commission from 2006 to 2008. She served on the Board of Directors of the Federation of Tax Administrators for 8 years before joining FedTax to work toward the passage of federal legislation granting states’ collection authority over remote sales.

[iii] The notion that out-of-state retailers would find it overly burdensome to keep track of every state’s sales tax rules can be traced directly to the 1967 Supreme Court ruling in National Bellas Hess v. Illinois Department of Revenue. In its majority opinion, the court ruled thatthe many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions” (emphasis added).

In 1992, the matter of remote sales tax collection came before the Supreme Court again in Quill v. North Dakota. This time, the court reaffirmed the earlier Bellas Hess decision by a ruling of 8 to 1, primarily on the basis of stare decisis. The ruling went on to state, “[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”

FedTax frequently cites the earlier Bellas Hess quote because it summarizes the ruling’s basis in complexity and burden, which has rippled forward to the present day and created a tidal wave of unintended consequences. This ruling has shielded all out-of-state retailers from the obligation to collect sales tax, based purely on the notion that it would place too much of a burden on businesses. Perhaps it would have, in 1967. That was the year the floppy disk was invented at IBM.

[iv] States typically depend on voluntary means of collecting from individuals, such as a voluntary line on the income tax form. Audit procedures, which are used for businesses, are ineffective for consumers.

[v] On Cyber Monday (the first Monday after Thanksgiving) in 2011, over $1.2 billion in sales were transacted online. On that day alone, approximately $58 million in sales tax went uncollected.

[vi] FedTax has been designated a Certified Service Provider (CSP) by the Streamlined Sales Tax Governing Board specifically for its TaxCloud service. There are six CSPs and 24 member and associate member states.

[vii] Although “software and services” is not defined in the Marketplace Fairness Act, likely it will include Application Programming Interfaces (APIs), Web Services, rates and boundaries databases, and a process for certifying service providers to process returns accurately under state laws.

[Download PDF of FedTax Senate Finance Committee Statement – 4/25/2012]


Colorado’s online sales tax reporting requirements law finally killed

April 7, 2012

A federal judge has finally issued a permanent injunction on Colorado’s 2010 online sales tax reporting requirements law, which called for all online retailers to report purchases made by Colorado residents to the state’s Department of Revenue. A temporary injunction against the law was issued last year just before the reporting requirements would have gone into effect.

In his ruling, Judge Robert E. Blackburn looks at the precedent set by the 1992 Supreme Court case Quill v. North Dakota, which mandated that out-of-state retailers did not have to collect sales tax even as it recommended that Congress address the issue—which, of course, it has yet to do.

Blackburn writes:

Quill puts states like Colorado in a difficult position. The state cannot require out-of-state retailers, retailers with no physical presence in the state, to collect and remit sales tax on sales those retailers make to residents of Colorado. Residents who make purchases from those retailers are obligated to pay use tax on those purchases, but enforcing the use tax is significantly more difficult than enforcing the sales tax. Seeking to enhance enforcement of the use tax on those who make purchases from out-of-state retailers, a state understandably looks to the out-of-state retailers for key information that can enhance enforcement. However, if the state has a mandatory sales tax system, as does Colorado, enforcing a reporting requirement on out-of-state retailers will, by definition, discriminate against the out-of-state retailers by imposing unique burdens on those retailers. Such a system imposes a differential burden on out-of-state retailers because the different burden is imposed precisely because the retailer is an out-of-state retailer entitled to the protection of Quill. Quill creates the in-state versus out-of-state distinction, and the dormant Commerce Clause prohibits differential treatment based on that distinction. Only a change in the law by the Supreme Court or action by Congress can change this situation. Quill, 504 U.S. at 318 (“Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”) (emphasis ours)

It’s worth repeating: “Only a change in the law by the Supreme Court or action by Congress can change this situation.”

Our readers may be surprised, given our support of states’ efforts for online sales tax collection in general, that we agree with Judge Blackburn—on his overall ruling, the fact that Quill makes the current situation difficult for states, and his assertion that only federal action, not state, can remedy the situation.

State after state has tried to increase the collection of sales tax on online purchases, but only a federal law, like the Marketplace Fairness Act, can overcome the limits set by Quill—or, more precisely, can exercise the interstate commerce authority reserved for Congress via the (dormant) Commerce Clause.

One other interesting point: Colorado doesn’t include a line on its income tax return form for reporting and remitting sales tax on online purchases. The reason given? That “the amount of tax collected did not justify the printing expense.” We have to think that, while that may have been true in 1974, it wouldn’t be true anymore, and it does seem like a reasonable measure to impose until Congress acts on online sales tax collection.

But the inclusion of this fact in the ruling leads us to another question. The ruling says that “there are at least three reasonable nondiscriminatory alternatives” to reporting requirements that could also increase the collection of sales tax on online purchases: the line on income tax returns, increased auditing of businesses, and consumer education and notification programs aimed at increasing compliance.

What about the other states that have already implemented these, that include the line on income tax returns, have increased business audits, and created consumer education programs—and still have not seen satisfactory compliance with its sales tax laws? Would these states be permitted to implement reporting requirements?

Other ideas in the ruling make us think not, but better legal minds than ours may be tempted to try. We still oppose reporting requirements, primarily because they are an invasion of consumer privacy, but we wouldn’t be surprised if another state, fed up with lack of action by Congress, decides to try this approach.

The best course of action, as we have been arguing for a long time, is for Congress to pass federal legislation allowing states to require online retailers to collect sales tax, for many good reasons.


Amazon makes a deal with Indiana. Who’s next?

January 24, 2012

Indiana has been a member of the Streamlined Sales and Use Tax Agreement (SSUTA) since 2005, so we here at FedTax were surprised when we heard that affiliate nexus legislation (sometimes called “Amazon tax”) was being proposed there (H.B. 1119). Regular readers of this blog know that affiliate nexus laws expand the definition of nexus to include affiliate marketers— locally based websites that provide marketing for out-of-state merchants. Affiliate nexus laws are generally ineffective because, time, and time, and time,  and time again the impacted e-commerce retailers have demonstrated their willingness to sever ties with their in-state affiliates so they can avoid being singled-out as the only remote retailers being required to collect.

We were very pleased when we learned this was not going to happen in Indiana.  Governor Mitch Daniels announced that Amazon has agreed to begin collecting sales tax in Indiana in 2014—or even sooner if Congress enacts guiding legislation, like the Marketplace Fairness Act  (S.1832). In exchange, the Indiana legislature will not advance the proposed affiliate nexus legislation. As an additional benefit, the Indiana-based Simon Property Group (the largest shopping mall owner in the U.S.)  has agreed to suspend its lawsuit against the Indiana Department of Revenue over its failure to require Amazon to collect sales tax despite its three distribution warehouses in the state. Governor Daniels said that Indiana is the 4th state with such a tax collection agreement with Amazon, joining California, Tennessee, and South Carolina.

Now even more states are considering similar legislation. We do not intend to hatch a conspiracy theory, but some could draw the conclusion that these bills are being used as an indirect method of “requesting” that Amazon open distribution centers in their state. We hope Congress will act soon to end all this craziness.


House Judiciary Committee to hold hearing on online sales tax collection

November 30, 2011
House Judiciary Committee

House Judiciary Committee hearing

Tomorrow, November 30, the House Judiciary Committee will hold a hearing on “constitutional limitations on states’ authority to collect sales tax in e-commerce”—in other words, on whether states can or should be able to require online retailers to collect sales tax.

With three online sales tax collection bills before Congress and the holiday retail season heating up, it’s no surprise that Congress is moving to act on the issue.

The witness list includes one small business owner; senior executives from eBay, Overstock.com, and Amazon; Texas State Representative John Otto; and Indiana State Senator Luke Kenley, who is also president of the Streamlined Sales Tax Governing Board.

We’re pleased to see Congress moving ahead on the issue!


UT small business owners urge Congress to pass online sales tax legislation

October 26, 2011
Utah

Utah's small business owners want online sales tax collection

According to an article in the Wall Street Journal, small business owners from Utah traveled to Washington, DC, to “meet with members of Utah’s congressional delegation and Congressman Steve Womack, R-Ark., who introduced states’ rights ‘e-fairness’ legislation last week.” Although the article doesn’t specifically say so, it certainly sounds like the reason for the visit was to persuade Utah’s congressional delegation to support online sales tax legislation.

The article quotes small business owners making some good points about online sales tax collection:

“Small businesses across the state of Utah are struggling,” said Jared Hurst, owner of Rebel Sports, “and the unfair advantage given to online retailers hurts Utah businesses and local communities.” . . .

Betsy Burton, owner of the King’s English Bookshop in Salt Lake City, also supports Womack’s legislation. Her bookstore now draws cutthroat competition from online retailers such as Amazon.com.

“This is a huge economic issue,” said Burton. “Internet sales are getting bigger and bigger and if we can’t compete on this unlevel playing field, it will drive bricks-and-mortar businesses out of business. And we are the backbone of the economy.”

She’s not kidding. For every $1 million in new sales, Amazon creates 0.88 jobs. For the same $1 million in new sales, Best Buy creates 3.47 jobs.

The chair of the Utah Tax Commission, Bruce Johnson, also made a good point, one that we’ve heard many times from local retailers:

“People will go in and shop at a bricks-and-mortar retailer in Utah to get specifics,” Johnson said, “and then go buy the product on the Web to save sales tax.”

An executive at O.co (formerly Overstock.com), which is also based in Utah, repeated his company’s concern that it’s too difficult to collect sales tax for all states.

We know that’s not the case. We know that because we designed TaxCloud specifically to eliminate all the complexity and confusion of online sales tax collection.

We recommend that O.co executives take a look at TaxCloud. It’s comprehensive, easy to use, and FREE.


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