What’s wrong with “Hybrid-Origin” Sourcing?

January 21, 2015

On January 9, 2015, the National Conference of State Legislature‘s Task Force on State and Local Taxation convened a legislative hearing on the matter of remote sales tax collection. Testimony was provided by twelve witnesses including:

  1. Steve DelBianco from NetChoice
  2. Hamilton Davison from the American Catalog Association,
  3. Devin Whitney from PayPal
  4. Mike Massey from Massey’s Outfitters
  5. Craig Johnson from the SSTGB
  6. Fred Nicely from the Council on State Taxation
  7. Joseph Henchman from the Tax Foundation
  8. Joe Crosby from MultiState Associates
  9. Steve Kranz from McDermott Will & Emery
  10. Leslie Fox from the International Council of Shopping Centers
  11. Joe Rinzel from the Retail Industry Leaders Association
  12. Rachelle Bernstein from NRF

For those of you interested in viewing the complete testimony from the January 9 hearing, NCSL has uploaded videos (Part 1 and Part 2) available on the NCSL YouTube Channel.

We know that many of you are, like us, a bit on the sales tax geeky side of commerce, so today we are proud to share the complete prepared testimony of one of those witnesses, Mr. Craig Johnson, Executive Director of the Streamlined Sales Tax Governing Board.

Statement of Craig Johnson at the National Conference of State Legislature’s Task Force on State and Local Taxation in New Orleans, LA on January 9, 2015:

Thank you Senator Althoff, Delegate Hixson, Representative Perone, and Members of the NCSL Task Force on State and Local Taxation for the invitation to talk to you today.

Introduction

My name is Craig Johnson and I am the Executive Director of the Streamlined Sales Tax Governing Board. I appreciate the opportunity to talk with you today about some of the concerns and questions I and others from the Streamlined Sales Tax Governing Board have regarding the hybrid-origin sourcing concept being discussed as a possible alternative to the Marketplace Fairness Act or similar legislation; and also provide you some information on what the Streamlined Sales Tax Governing Board member states have already done to successfully simplify the collection, reporting and remittance of sales tax on remote sales using destination-based sourcing.

I want to stress that the goal of the Streamlined Sales Tax Governing Board is to find a federal solution that is fair to all of the players involved – remote sellers, purchasers and the states – and that is not subject to easy manipulation by sellers or purchasers. We firmly believe that what we have done through the Streamlined Sales and Use Tax Agreement has proven that destination-based sourcing works because of the simplifications and uniformity requirements contained in the Streamlined Sales and Use Tax Agreement and the services offered by our Certified Service Providers.

Hybrid-Origin Sourcing

Although I and others from the Streamlined Sales Tax Governing Board have met several times with one or more members of the Judiciary Committee staff to try to obtain legislative language – even draft language – we have not been provided anything more detailed than this diagram. Therefore, I want to make it clear that no legislative language related to the hybrid-origin sourcing concept has been provided to us to date (January 9, 2015) and the comments that I am providing are based solely on the verbal descriptions and communications we have had with Judiciary Committee staff and the general concept as described in Mr. Christopher Cox’s testimony before the House Judiciary Committee in March of 2014.

Concerns and Questions Related to Hybrid-Origin Sourcing:

The Streamlined Sales Tax Governing Board has a number of concerns and unanswered questions with the respect to the hybrid-origin sourcing concept.

1. The Compact – Why would a state join the Compact?

States must join the Compact in order to obtain this collection authority. Sure the states would have the option of joining or not joining and yes they might obtain some additional revenue that goes uncollected today – but only from remote sellers in the other states that also choose to join the Compact. However, by joining the Compact, states are also subjecting their own in-state sellers to the requirements that they:

  1. Collect tax on transactions that today they are not required to collect on (which will also put them at a competitive disadvantage with those sellers that are not located in a Compact state and don’t have to collect tax),
  2. Gather and maintain the necessary information to identify which zip code and which state is entitled to the tax along with the amount of tax, and
  3. Complete a more complex return where they will be required to list out each zip code and/or state into which they made a sale along with the amount of tax collected for each of those zip codes and/or states. Every state that joins the Compact will also have to figure out how to process returns with this additional information and implement a system to get this revenue to the proper state or clearinghouse that would need to be created.

It is very unlikely that the five non sales tax states would join the Compact because by joining they would be supporting a true tax increase on their own residents by requiring them to pay sales tax on any purchases they make from remote sellers located in other Compact states, when today, those same purchasers do not legally owe any sales tax on those purchases. If they joined the Compact, they would also be requiring their own in-state sellers to either start collecting, accounting for, reporting and paying sales taxes on any remote sales made to purchasers located in other Compact states or report the necessary information to the purchaser’s state so the purchaser’s state could pursue collecting the use tax due. Based on this, does anyone really think any of the five non-sales tax states would voluntarily choose to join this Compact?

It is not just the non-sales tax states that would be raising taxes on their own residents under this concept. States with a low sales tax rate would also be subjecting their residents to a tax increase on any purchases they make from a remote seller located in any other Compact state that has a higher sales tax rate. The fact is that the only state’s residents that could be guaranteed to not end up with a tax increase on their remote purchases are those residents located in the highest rate state. Otherwise, any purchaser from any state that purchased a taxable product from a remote seller located in the highest rate state would see a true tax increase.

Let me explain this a little further. For example, if we just take state sales tax rates into account, California had the highest state sales tax rate as of January 1, 2014 at 7.5%. If all the states join the Compact, purchasers in EVERY state that make a purchase from a remote seller located in California would see a tax increase under hybrid-origin sourcing. At the same time, every California purchaser that made a purchase from a remote seller in any other state would see a tax decrease. Although this might sound good to the residents of California, this ultimately could result in California’s sales tax revenues declining as more and more purchasers figure out that they can save sales taxes by making purchases from remote sellers located in any other state and they only have to pay the lower rate – and California is prohibited from requiring them to pay any additional tax on the transaction. Is it right that the State of California’s sales and use tax revenues could be severely affected by the actions of the legislators in another state? Would California really want to join the Compact and risk seeing their sales tax revenues go down? Would California want to put their remote sellers at this competitive disadvantage? Do you really think the other states would join the Compact knowing that they are likely approving a true tax increase on all of their own residents?

Under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, purchasers in the same state would be required to pay the same amount of tax on purchases from remote sellers, regardless of where that remote seller is located. This would eliminate any true tax increase and allow each state to control its own sales and use tax revenues.

2. Sellers Will Move to Low or Non-Sales Tax States or States That Have Not Joined the Compact

Sellers know and understand the advantage they gain when they do not have to collect sales tax on a transaction but a competitor does. Likewise, many purchasers are willing to make their purchases while only looking for the lowest overall price – even if the only difference in the price is the sales tax. After all, unless I am buying something that I think I will need serviced after I purchase it, do I really care which seller I purchase it from? If ten vendors are selling the exact same product, most purchasers are going to look at which vendor they can get the product from for the lowest overall cost.

Under the hybrid-origin sourcing concept, any state that does not join the Compact will potentially become a tax haven for remote sellers – and purchasers will figure out who to buy from to legally avoid paying the tax. The end result of this over time will be that states that have joined the Compact or have a sales tax will likely see sellers making remote sales move to states that either have not joined the Compact (so they can continue to make their remote sales tax free) or to states with either no sales tax or very low sales taxes. Do we really want a system where remote sellers may choose which state to locate their business in based on whether or not they will have to collect sales tax on their remote sales?

Under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, the location of the seller would have no effect on the amount of tax the remote seller would be required to collect. This would eliminate the collection of sales tax from being a factor in a seller’s decision of where to locate its business.

3. Purchasers Will Buy Products from Remote Sellers Located in Other Compact States That Do Not Impose Sales Tax on the Particular Product They Are Looking For – Compact States Will Eventually See Their Sales Tax Revenues Decline

Under the hybrid-origin concept, remote sellers will apply the sales and use tax laws, rules and regulations that are in effect for their own home state, regardless of what the laws, rules and regulations are in the purchaser’s state. At the same time, states will be prohibited from imposing use tax on the purchase of a product by a purchaser located in their state from a remote seller. This type of system is vulnerable to manipulation by the purchasers. Let me give you a simple example.

Let’s assume that every state joins the Compact. State A currently does not impose sales tax on clothing, but State B does. Purchasers will figure out that if they buy clothing from a remote seller located in State A, the remote seller is not required to collect any sales tax on the transaction. But if they purchase the same clothing from a remote seller located in State B, they are required to pay the tax. Eventually everyone will know that if they purchase clothing from a remote seller in State A, as opposed to State B, they will not have to pay any sales (or use) tax. Although State A’s remote seller’s business will likely flourish, State B’s remote seller’s business will likely suffer. In addition, the states in which the purchasers are located will eventually see their sales tax revenues decline because the purchasers have figured out a way to avoid paying sales tax on clothing. Under extreme circumstances, this effectively puts one states sales tax revenues partially under the control of another state’s legislature which may choose to exempt a particular product.

Again, under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, purchasers would be required to pay the same amount of tax on purchases from remote sellers, regardless of whether the state in which that remote seller is located taxes or exempts the particular product.

4. Purchasers Will Be Required to Pay the Tax Based on the Seller’s Home State Even If the Purchaser is Located in a State that Does Not Impose Sales Tax

Under the hybrid-origin concept, purchasers are required to pay the tax that is imposed based on the seller’s home state laws, rules and regulations. This will result in purchasers located in states that exempt certain products being required to pay sales tax on their purchases from remote sellers of these products because the seller’s home state imposes tax on these products. This is another true tax increase that states that join the Compact would be approving.

Let’s assume again that every state has joined the Compact. A purchaser is located in State X and buys some clothing from a remote seller located in State Y. State Y imposes sales tax on clothing while State X does not. Although the purchaser is located in State X and the clothing is delivered to State X, under the hybrid-origin sourcing concept, this purchaser would be required to pay State Y’s sales tax on this transaction – when prior to State X joining the Compact, the purchaser would not have owed any tax to State X or State Y on this transaction. This is another example of a true tax increase that will result under the hybrid origin concept – but which would not occur under the Marketplace Fairness Act or similar destination-based sourcing legislation.

5. Multi-State Sellers Will Need to Have Multiple Sales Tax Calculation Systems in Place

Under the hybrid-origin sourcing concept, a seller that makes remote sales into another Compact member state would be required to apply its home state rules to those transactions – even though this may or may not even be the location from which the product is shipped. That same seller may also make sales to purchasers that are located in another Compact state in which the seller has nexus, but which is not its home state. For those transactions, the seller will have to have a system that applies the laws, rules and regulations of the state into which the product is shipped (i.e., destination-based sourcing rules). Finally, that same seller may also make remote sales to a purchaser that is located in a non-Compact state in which the seller does not have nexus or any physical presence and therefore is not required to collect any tax. Under the hybrid-origin sourcing concept, that seller will need to have multiple systems running parallel to account for each of the different scenarios the seller may encounter.

Under the under the Marketplace Fairness Act or similar legislation that utilizes the proven destination-based sourcing regime, sellers will only need to have one system in place that consistently applies the laws, rules and regulations of the state to which the product is delivered to the purchaser.

The above questions and concerns are just some of the issues that the Streamlined Sales Tax Governing Board has with respect to the hybrid-origin sourcing concept based on discussions with members of the Judiciary Committee staff and without having seen any specific legislative language. Additional questions or concerns may arise once legislative language is provided.

Editor’s note: Soon after the January 9 NCSL hearing, a Hybrid-Origin Discussion Draft bill was made available on January 15, 2015

Has Streamlined Ever Considered Origin Based Sourcing?

Although the discussion today is focused primarily on the hybrid-origin sourcing concept, I do think it is important that you also know that in the early stages of the development of Streamlined, the state legislators, administrators, attorneys, accountants and business community members involved did weigh the pros and cons of an origin based sourcing regime. In fact, there is an issue paper on our website from back in 2002 that discusses the various sourcing options. During those discussions, it was recognized that theoretically an origin-based system is a more manageable obligation strictly from the seller’s perspective for many of the same reasons proponents of the hybrid-origin concept are using. But when the pros and cons were all taken into account, it was determined that destination-based sourcing was the way to go and was already being followed with respect to interstate sales. At that time, some of the disadvantages of using an origin-based system that were identified included the following:

  • Origin sourcing has the same effect as an export duty and has all the disadvantages that go with it;
  • States using origin based sourcing would be burdening their own businesses with a tax that will potentially put them at a competitive disadvantage with others in the remote sales market that are located in states that don’t follow origin sourcing; and
  • Origin based sourcing will affect the decision of where a business locates and states don’t want to get into a downward spiral competition with other states on this issue – especially those states where sales tax is a significant source of their state’s revenue.

When the Project thought about these disadvantages, it came to the conclusion that

…the only way to avoid these practical impediments in an origin system is to require all jurisdictions to impose an origin sales and use tax on generally the same base and at generally the same rate. In this circumstance, there is no substantial disparity that follows from the origin of the goods or services coming into the destination State, at least for domestic, but not international, commerce. This requirement flies in the face of our federal form of government, however. ‘Our Federalism’ allows each State to determine its own tax policy, including a policy of not taxing consumption through a sales and use tax at all.

Throughout the above discussion, I have noted several times how the Marketplace Fairness Act or similar destination-based sourcing legislation eliminates the issues that can occur under the hybrid-origin concept (i.e., tax increases, having multiple systems to account for different types of transactions, preventing sellers from locating in one state or another to take advantage of not having to collect sales tax, tax havens, etc.).

Streamlined currently has over half of the states with a sales tax as members of the Streamlined Sales Tax Governing Board. We have over 2,300 retailers that have voluntarily agreed to collect and remit the taxes in our member states, regardless of whether the seller has nexus or a physical presence in one or more of the member states. Based on the amounts reported by member states, these sellers have collected and remitted over $1.7 billion of sales tax since October 2005 that may otherwise have gone uncollected. Because of the simplifications, uniformity provisions, rate and jurisdiction databases and taxability matrices that member states are required to provide, many of these sellers have even chosen to calculate, collect, report and make the required remittances completely on their own. If collecting the taxes was as costly as some of the opponents of Streamlined make it out to be, these sellers would not stay registered and continue to calculate, collect and remit the taxes in those states where they are voluntarily doing so – they would unregister and only collect in the states where they had a legal obligation to collect. The technology is there and has made calculation, collection and remittance of sales tax much easier and less burdensome for sellers than in the past.

In addition, for those sellers that don’t want to do this on their own, Streamlined has Certified Service Providers that our member states compensate to provide the software and services necessary to integrate their software with the seller’s systems and that take care of the tax calculations, compile the data and prepare the returns, file the returns, make the necessary remittances to each of the states and handle any audits of the remote sellers on the transactions they processed in the member states where the seller is voluntarily collecting the tax. And best of all – this is provided at no charge to the sellers for all of the member states in which the seller is voluntarily collecting and remitting the tax. Destination-based sourcing can and does work and our organization is living proof of it.

Conclusion:

The Streamlined Sales Tax Governing Board continues through the cooperative effort of state legislators, state tax administrators, accountants, attorneys, and the business community, to look for ways to make sales and use tax systems simpler and easier to administer from both the state’s and business’ perspective – while at the same time protecting state sovereignty and making it fair for all parties – sellers, purchasers and the states.

Unfortunately, the hybrid-origin sourcing concept is an attempt to turn the tried and true destination-based sourcing hierarchy upside down and will result in a tax increase on millions of Americans. This alone will prevent most if not all states from joining the Compact that would be required to obtain collection authority and would result in Congressional authority that few if any states would adopt – leaving states no choice but to continue to find creative ways to be able to compel sellers to collect their sales tax. States don’t want to have to do this and I don’t believe any business wants this either.

I thank you again for the opportunity to discuss some of the Streamlined Sales Tax Governing Board’s concerns and questions with respect to the hybrid-origin sourcing concept and the opportunity to briefly describe some of the successes of the Streamlined Sales Tax Governing Board.


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.

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.


Update: States eager for online sales tax action

February 7, 2013

In early December, we posted about states taking action on online sales tax collection.

As we noted then, states can’t do much without federal legislation, and support is growing in Congress for a bill that would give states full authority to require online retailers to collect sales tax.

But in the meantime, more states have started looking at what they can do.

Hawaii, Florida, and Michigan are all considering bills that would require an out-of-state retailer to collect sales tax if the retailer has an affiliate in the state.

Hawaii is also looking at adopting the Streamlined Sales and Use Tax Agreement, a set of guidelines that make collecting sales tax easy for retailers.

And while Virginia isn’t considering state action, it is counting on congressional action. The state’s proposed plan for transportation funding assumes that Congress will pass online sales tax legislation, allowing Virginia to collect hundreds of millions of dollars in uncollected sales tax.

States have already said that online purchases are subject to sales tax—but most of that sales tax goes uncollected. What they need now is federal legislation, and with each state-level bill or resolution, they’re sending Congress the clear message that the time to act is now. Let’s hope Congress is listening.


Guest TaxGirl post: “Why I support the Marketplace Fairness Act”

August 27, 2012

Every August Forbes contributor Kelly Phillips Erb, who writes the TaxGirl blog, asks her readers to send in guest posts to be published while she’s on vacation.

This year she provided three topics for guest posts, including “Is it fair to require online retailers to collect and remit state sales tax?”

Sten R. Wilson has contributed a post on that topic titled “Why I support the Marketplace Fairness Act.” In it, Wilson, owner of a sheep farm in upstate New York, explains that for him, collecting sales tax has been made much easier by states’ simplification of sales tax laws (through the Streamlined Sales and Use Tax Agreement) and by automated sales tax management services.

He supports the Marketplace Fairness Act because it provides incentive for states to simplify their sales tax laws:

The combination of today’s freely available technology and states’ simplification efforts is a great benefit for small businesses like mine. It eliminates bureaucracy, promotes efficiency, and increases productivity and profitability. It makes dealing with sales tax much, much easier for small business owners.

Passage of S.1832 the Marketplace Fairness Act will prompt all states to simplify their sales tax laws. Therefore, I support the Marketplace Fairness Act.

We sincerely agree! Wilson’s perspective as a small business owner is an important one in the online sales tax collection debate, and one that we haven’t seen enough in the media. The post is definitely worth a look.


What wasn’t said at yesterday’s Senate hearing, but should have been: Free!

August 2, 2012

At yesterday’s Senate Commerce Committee hearing, numerous senators voiced their support for the Marketplace Fairness Act, which would close a loophole that allows online retailers to avoid collecting sales tax.

Several senators, among them Senator Lamar Alexander (R-TN), said that they were particularly concerned about states’ rights. Under the current system, states cannot enforce their own sales tax laws; the bill would allow states to decide if they want to require online retailers to collect sales tax from state residents. Others cited concerns about simple fairness: Local small businesses—particularly those that sell high-end goods such as cameras, jewelry, and electronics—often serve as showrooms for customers who then buy online to avoid paying sales tax. The inequity is hurting local small businesses across the country.

Opponents of the bill were primarily concerned with the costs and complexity of collection, saying that it would be too difficult and expensive for small online retailers. Several supporters responded that if the bill is passed, more sales tax management services will be created and the market will act to bring down costs.

Scott Peterson, Executive Director of the Streamlined Sales Tax Governing Board, testifies before the Senate Commerce Committee, and even shows off to the members of the committee how easy and accessible sales tax has become – that you can even do it on a common device, like this iPad (and yes, that’s TaxCloud).

Which brings us to what wasn’t said: The market has already acted. A completely free sales tax management service is available right now. TaxCloud calculates the sales tax due for any region of the county, collects and remits sales tax, files sales tax returns, creates detailed records of sales tax transactions for shop owners, and even provides indemnification and audit relief—in short, it resolves every concern raised by Senator Kelly Ayotte (R-NH). It does all this at absolutely no cost to the business.

It’s too bad that this wasn’t mentioned by any of the bill’s supporters, because it directly counters opponents’ primary objection to the bill. We don’t have to wait for the market to act to bring down the costs of collecting sales tax. That cost can range from zero to as much as a business wants to pay, depending on the service a business chooses—there are multiple options already on the market today, including Accurate Tax, ADP TaxWare, Avalara, CCH SpeedTax, Exactor, and TaxCloud. Importantly, a no-cost option is already available.

Overall, the hearing showed a great display of support from many senators—and, we were pleased to note, except for only a few instances (which we will resist detailing here), an atmosphere of professionalism, courtesy, and collegiality reigned, even among those who disagreed on the issues.

You can view a video of the hearing on the Senate Commerce Committee website.


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.


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