Response to Senator DeMint’s WSJ op-ed on internet sales tax

August 3, 2012

Los Angeles Times: Online sales taxes [are] not taxation without representation


Los Angeles Times: Online sales taxes [are] not taxation without representation.
RILA
RILA responds to Senator DeMint’s WSJ op-ed
NRF
NRF sends a letter to senators Enzi, Durbin, and Alexander—the three main sponsors of the bill—rebutting Senator DeMint’s assertions

We had planned to respond to and correct the inaccuracies in Senator Jim DeMint’s recent Wall Street Journal op-ed on the Marketplace Fairness Act, but the Los Angeles Times, the Retail Industry Leaders Association (RILA), and the National Retail Federation (NRF) all beat us to the punch.

The first to respond was the Los Angeles Times, which emphasized that collecting sales tax online is not taxation without representation—in fact, as we discuss below in more detail, the origin-based sales tax Senator DeMint supports would actually create taxation without representation, not prevent it. The system proposed by the bill keeps power in the hands of the states and their residents.

Then, RILA released a press release that itemizes nearly every statement in the op-ed and offers either a correction (there were a lot of misleading or false statements in the piece) or a differing viewpoint for each.

For its part, the NRF sent a letter to senators Enzi, Durbin, and Alexander—the three main sponsors of the bill—rebutting Senator DeMint’s assertions.

We recommend reading all three responses, but here are some of the most important points to take away:

1. Sales tax is already due on online purchases.

2. The Marketplace Fairness Act would not require online retailers to “pay sales tax” (in their own state or any other). It would end a loophole that lets online retailers avoid collecting sales tax from their customers. That sales tax is due to the state where the customer lives (and presumably votes), and it pays for roads, fire and police departments, schools, and other public services. It is not taxation without representation, any more than the sales tax you pay at your local drugstore is.

3. By allowing states to require online sellers to collect sales tax, the bill would level the playing field for all retailers. The federal government shouldn’t pick retail winners and losers, as it does when it says online retailers don’t have to collect sales tax.

4. The bill doesn’t create a national sales tax or tax online access or online shopping. It actually gives power back to the states, who would get to decide for themselves whether and how sales tax is applied.

5. The bill doesn’t raise taxes. It just gives states the power to enforce their own sales tax laws. States retain the authority to determine sales tax rates, which apply only to goods sold within the state.

6. Senator DeMint supports an origin-based sales tax. “Origin-based sales tax” means that the sales tax rate where the seller is located is applied to the purchase, and it currently only applies within a state’s borders. Essentially, a state can say that if both seller and buyer are located within the state but in two different tax jurisdictions, the seller’s sales tax rate applies—and the sales tax the buyer pays is sent to the seller’s location.

Imagine if this were applied nationally. The very thing Senator DeMint fears would come true: taxation without representation.

Because under that system, if I live in California and buy something from a seller who’s in New York, I have to pay sales tax to the State of New York, where I do not live or vote and where my tax money would go to pay for things I do not benefit from or use—and I’d have no say in how New York used my money. It’s the very definition of taxation without representation.

Senator DeMint is right that taxation without representation is a terrible idea, that the “nexus among Americans, their taxes, and their votes must remain as tight as possible. It is the essence of our democracy.” Unfortunately he’s completely wrong about how to make sure you get to vote on how your sales tax dollars are spent.

Sales tax must be (and, in most states, is) destination-based—it must be applied to the state and region where the person paying the tax lives, to ensure the person paying the tax has a say in how that tax money is spent and benefits from the public goods that tax money provides.

The Los Angeles Times article, the RILA press release, and the NRF letter make other good points, too. Take a look.


Bloomberg View editorial endorses taxation without representation

July 26, 2011

An article editorial from the National Review published late last night (7/25/2011) by Bloomberg View offers a frightening proposal . . .

Although the article starts out with a somewhat disrespectful tone regarding the Alliance for Main Street Fairness (which seems frankly uncalled for and doesn’t seem to enhance the article at all), it admits that the lack of sales tax collection on online purchases “is indeed unfair both to the mom-and-pop retailers . . . and to the larger companies.

The author should have mentioned that it is also unfair to local communities—communities that rely on sales tax revenue to fund vital local services that voters/consumers/taxpayers approve, either directly, through ballot initiatives, or indirectly, through their elected local governments. The National Conference of State Legislatures calculates that non-collection of sales tax on internet and mail-order purchases will cost over $23 billion during FY2012.

Strangely, as the solution to this enormous national problem, the author proposes a national origin-based sales tax system:

A far better solution would be for states to levy sales taxes based on where products are coming from rather than on where they’re going.

To understand the problem with this idea, one must first remember: Sales tax is local.

Our country was founded on the most basic concept of taxation with representation. That is why each state has its own House of Representatives and Senate—to ensure that there is local representation and a local voice regarding why, how much, and for what purpose you and your community will be taxed.

To adopt the origin-sourcing concept at a national scale would mean that if you bought something from an online store that charged you sales tax based upon where that online retailer is located, then you would be paying a sales tax you did not vote on.

Consider if you lived in California and bought a $1,100 LED TV from an online consumer electronics store based in New York City. Under the author’s plan, the NYC retailer would add 8.875% to the price of your TV ($97.63) and remit those proceeds to the retailer’s jurisdiction—New York City—not your California jurisdiction.

Under such a plan, you would be forced to pay a tax without any representation.

Origin sourcing gets even more toxic at a national scale. Consider how many e-commerce retailers in California or New York (or any of the 45 states with sales tax) would immediately relocate all operations to a state with no sales tax just to stay competitive—if you think your property and income taxes are high now, imagine what would happen if 40% of these states’ annual budgets vanished overnight.

The author bases his proposal on a PricewaterhouseCoopers study published in 2006, which was researched in 2004 and is based on costs incurred by retailers in 2003. To be blunt, this research is hopelessly out-of-date. Fortunately for all of us, technology and the internet have come along way since 2003! For example, in 2003 Facebook and YouTube did not exist and Google was still a private company. Also, since 2003, the Streamlined Sales and Use Tax Agreement has achieved significant simplifications in state-by-state sales tax laws, and today 24 states  (more than half of the 45 states with sales tax) have voluntarily adopted its simplification measures.

The article says the anticipated Main Street Fairness Act “imposes costs on the economy out of proportion with any revenue it might generate.”

I am sure the author and his readers will be happy to learn that this concern is moot. Our company launched TaxCloud over a year ago, and it calculates, collects, remits, and even responds to audits for retailers—all at no cost. Using TaxCloud, any retailer (large or small, online or offline) can collect accurate local sales tax for any address in the US in 13 milliseconds, with no cost burden and minimal technical burden.

Once again, sales tax is local—when online retailers refuse to collect, it only hurts your community.

Finally, the article is also surprising given that we briefed their editorial staff about this matter (in February), and Bloomberg has published three very supportive articles over the same number of months:

  1. Bloomberg.com supports online sales tax collection – 7/15/2011—just 11 days ago
  2. Bloomberg Businessweek article reaches surprising conclusion – 6/6/2011
  3. Businessweek editorial: “To help Main Street, close the internet sales tax loophole” – 5/2/2011
Apparently we need to request another briefing.
UPDATE: The author is not a Bloomberg editor but rather a senior editor at National Review.

Businessweek editorial: “To help Main Street, close the internet sales tax loophole”

May 2, 2011
Bloomberg BusinessWeek

Bloomberg BusinessWeek

Bloomberg Businessweek has published a terrific editorial in favor of online sales tax by the “co-founder of community development group American Independent Business Alliance.”

We were particularly happy to see him point out that technology makes it easy for online retailers to collect sales tax. Although the Supreme Court ruled in 1967 and 1992 that retailers need to collect sales tax only for states where they have a physical presence, that was long before technology changed both the marketplace and the collection of sales tax:

Internet retailing didn’t exist, so it’s unlikely the justices foresaw business owners punching a Zip Code into software that automatically calculates sales taxes or consumers instantly comparing product prices among shopping sites. . . .

Since then, the retailing world has been transformed by accelerating online sales, but the nearly 20-year-old ruling still governs. Until Congress acts, we’re stuck with online retailers enjoying a privilege that grossly distorts market competition.

TaxCloud, our comprehensive sales tax management service, is one of those services that “automatically calculates sales taxes,” but it also does much more: it files tax returns, generates monthly state-by-state reports, handles audits and exemptions, and more. The best part? It’s completely free. With services like TaxCloud available, it’s hard to imagine that the Supreme Court rulings exempting out-of-state retailers from collecting sales tax—which were entirely based on the idea that it would be too difficult—makes sense in today’s world.

The editorial also neatly summarizes the problems facing states:

The 45 states with statewide sales taxes face three major problems. First, their storefront businesses investing in local facilities and employees are severely handicapped when their remote competitors are effectively subsidized by 5 percent to 10 percent. Second, states will see substantial declines in sales tax revenue unless this imbalance is addressed. Lastly, Internet retailers are using the tax exemption to evade tax obligations even in states where they have obvious nexus.

Opponents of online sales tax often say that it’s major chain stores, like Best Buy and Wal-Mart, that are supporting online sales tax legislation. But the editorial points out that not only do small, mom-and-pop stores have more to lose when online retailers don’t collect sales tax, they contribute much more to communities, so their loss will have a much larger impact:

While both chains and independents are affected, the loss is especially harmful when local entrepreneurs close up shop. Studies by another community development group, Institute for Local Self Reliance, and economic planning consultancy Civic Economics have shown independents’ sales typically generate at least three times more local economic benefit per dollar than sales at chain outlets. A 2009 University of Tennessee study estimates that $11.4 billion will go uncollected on Internet sales next year, but the resulting loss of local retailers may outweigh the direct tax revenue lost to states and municipalities. 

We could quote even more from the editorial, but instead we’ll just suggest that you read it yourself.

We were puzzled by one thing in the editorial, however: the suggestion that it would be best “to apply a universal tax rate of, say, 5 percent for all interstate retail sales and divide the revenue proportionally among states.” There are two primary problems with this suggestion.

First, a universal tax rate would be taxation without representation. Sales tax rates are voted on by those who have to pay it. Applying a universal tax rate would be take that right away from voters and put it in the hands of the government.

Second, the author proposes a universal tax rate because of his concern that collecting online sales tax would be difficult for small businesses. But as we’ve discussed above, services like TaxCloud make it easy for a retailer of any size, even a sole proprietorship, to collect sales tax. What’s more, the Streamlined Sales and Use Tax Agreement has a small business exception—retailers with less than a certain amount of online sales would be exempt from collecting sales tax. So there’s no need to change the way sales tax works, taking away voters’ right to approve sales tax rates in the process, just to protect small businesses—they’re already protected.

But aside from that suggestion at the end, the editorial is a brilliant, well-reasoned argument, and we recommend you read it.


Colorado Senate revises HB 1193 to focus on Use Tax Reporting

February 9, 2010

The Colorado Senate has revised HB 1193 quite dramatically.

The Good News: It no longer appears to be targeting affiliate marketing.

The Bad News: It makes no mention of conforming to the Streamlined Sales and Use Tax Agreement. In fact, it now goes into extraordinary detail asserting jurisdictional authority over out-of-state businesses.

Specifically, it states that any out-of-state business which does not voluntarily collect and remit Colorado sales tax must:

  1. Notify each Colorado customer that sales or use tax is due on all purchases from the business, and the purchaser must specifically file a sales or use tax return with the Colorado Department of Revenue. Failure to deliver this notification will subject that out-of-state business to a $5 penalty for each failure to notify.
  2. Send separately to each Colorado customer (by actual First-Class Mail by itself in an envelope labeled “Important Tax Document Enclosed”) an end-of-year summary showing the total amount paid by the customer for all purchases over the past year to that business, and reminding the customer again of their obligation to file a sales or use tax return and pay the appropriate use tax for all such purchases.
  3. Send to the Colorado Department of Revenue (by March 1 of each year) a statement detailing each Colorado customers purchasing activities during the preceding calendar year. Failure to send this statement shall subject the out-of-state business to a $10 penalty for each purchaser which should have been included in such annual statement.

There is also a fair amount of language devoted toward empowering the Colorado Department of Revenue the right to issue subpoena requiring attendance to take oral or written testimony under oath, and to produce all records relating to sales to Colorado residents, along with authorization for judicial enforcement and ability to order judgment against the retailer for contempt.

Holy burden building batman!

Now instead of businesses cancelling their affiliate programs in Colorado, businesses may just suspend all sales efforts in Colorado.

Please Colorado legislators – can we have a few minutes of your time to discuss this matter?

UPDATE 3/2/2010 – This was signed into LAW last week (on Feb. 24th) by the Governor of the State of Colorado.


Sorting out “Sales Affiliate” Taxes

July 20, 2009

UPDATED: There are TWO initiatives underway right now regarding taxation of Internet sales.

At the moment, the more visible of these two initiatives is the so-called “Amazon Tax.”  This effort is aptly described as the “Complex Nexus” initiative – it involves unilateral state-by-state legislation designed to redefine the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses.

The second of these two initiatives is commonly referred to as the “Streamlined Sales Tax” initiative – which involves a multilateral forty-four state coalition which has been working together for over ten years to modernize and simplify sales tax codes to ensure consistent collection by all businesses.

As the media and legislative spotlights have turned toward these debates, they have been categorically referring to them under a single topical headline of “Internet Sales Tax”.  While the dramatic posturing of opposing viewpoints in the debates over these initiatives are as familiar and timeless as taxation itself, we have also seen these debates evolve into unintentionally combining or confusing these two initiatives as one single effort.  This is unfortunate as the two initiatives have dramatically different implications, legal precedents, and costs to consumers and internet merchants large and small.

Complex Nexus legislation was first developed in isolation by the State of New York in 2008, which has resulted in ongoing litigation between that state and Amazon.com and Overstock.com.  The basics of this redefinition of nexus instruct that when an out-of-state company (let’s say “Company X”) pays a sales commission to a web site located in New York (”CompanyY”) for linking a customer from Y’s website to X’s website, then Company X has established economic nexus, and is then required to register as a business in that state – with full licensing obligations and tax collection requirements, just as if Company X had a “swinging door” retail location in that state.  This approach seems to be exclusively targeted toward affiliate marketing businesses, (e.g. Amazon Associates, Commission Junction, Google Affiliate Network, Overstock.com, etc.).

The New York law activates upon any Seller (regardless of location) who pays a commission to a New York entity related to the sale of over $10,000 worth of taxable goods over the preceding 12 months – that seller’s New York affiliate is to be considered an employee or agent of the Seller, effectively establishing substantial economic nexus.  Specifically an agent/affiliate would be any New York entity which actively solicits New York residents and “directly or indirectly refers potential customers, whether by a link on an Internet website or otherwise” to the Seller.  An as-of-yet undetermined implication of this approach is whether other geographically targeted advertising-based relationships may also qualify under such Complex Nexus legislation.  Will pay-per-click and pay-per-lead be clearly delineated from commissions on sales?  A significant concern surrounding this legislation is that it could be interpreted to include any commission bearing direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus, which is why we call it Complex Nexus.

It is in this context that over the last few weeks the Amazon Affiliates program has threatened to cut ties with affiliates in California, and actually ceased operations with affiliates in Rhode Island, North Carolina, and Hawai’i – potentially cutting off revenue streams to thousands of small businesses.  This step is unfortunate but understandable, as Amazon.com is being forced to withdrawal its affiliate programs in these states based upon their contemplated adoption of Complex Nexus laws.

Perhaps what is most puzzling regarding these states’ recent pursuit of Complex Nexus legislation is that all of these states have also been working on and contributing toward the formulation of the Streamlined Sales and Use Tax Agreement (SSUTA) since 2000.

The SSUTA is an approach to Internet sales tax resulting from 10 years of iterative legislation, negotiation, and development involving a collective effort of vendors, technology providers, industry associations, and forty-four states. Participants include New York and the other states now considering legislation implementing Complex Nexus. SSUTA is designed to simplify and standardize sales and use tax laws (including standard definitions for taxable goods, tax holidays, and rate change notices), with the goal of enabling any out-of-state sellers to easily comply with local sales tax initiatives. Moreover, unlike the concept of Complex Nexus, SSUTA is also based upon and supported by an extensive body of regulation and case law surrounding sales and use tax jurisdiction and liability.

In 1992, the Supreme Court confirmed in Quill Corp. v. North Dakota that taxation of interstate retail transactions (at the time mail order) were under the control of Congress, and declined to redefine place of business to include Quill Corp. catalog recipients in North Dakota. At that time, it was unrealistic to require remote sellers to keep track of many thousands of state and local tax codes, and thus interstate transactions have not to date been subject to taxation. However, with the rapid evolution of the Internet along with the advanced computing resources and standardized tools available today, the technical capacity to keep track of hundreds of thousands of items, and tens of millions transactions per quarter is no longer in question.  We believe the continued commoditization of computing power is precisely what will enable SSUTA to succeed.

Sales tax, in many places, is the law of the land, and the privilege of a computer, a credit card and an internet connection should not exempt a purchaser from that obligation.  Sales taxes are approved directly or indirectly by the voters of each state, per the laws of that state, to pay for local police, fire and hospitals.  These sales taxes are routinely collected by merchants large and small, from the states’ residents.  This is taxation with representation at its classical best, and is cleanly implemented by the Streamlined Sales Tax approach and supported by a large crowd of commercial and government interests.

The Streamlined Sales Tax approach enables local sales taxes to be paid by the voters that vote upon, and benefit from, these local sales taxes – the citizens of the states themselves.  The  initiative supports taxation WITH representation.  While some states may choose to also expand the definition of nexus to encompass contractual business relationships, but this should not be conflated with SSUTA.

In the interest of full disclosure, Fed-Tax.net is a Certified Service Provider under the SSUTA, optimized for the needs of small merchants.  Our TaxCloud service is provided at no cost to merchants and only minimal integration required.  While our system enables accurate determination of local sales tax under any approach, we clearly believe the SSUTA model is best for taxpayers, businesses, and the states.