Tax Analysts Blog

Crafting a Better Mainstreet Fairness Act?

Posted on Apr 10, 2013

The Mainstreet Fairness Act (MFA) is continuing to gain steam. On March 27, the U.S. Senate voted 75 – 24 in favor of an amendment to support the act. The amendment was included as part of an overall debate of the Senate’s 2014 budget plan, which passed as a non-binding resolution.

Despite the show of support, the MFA has a long road ahead. To become law, both the House and Senate must pass the MFA as a stand-alone piece of legislation or as part of a larger bill. And now, U.S. Senate Finance Committee Chair Max Baucus, D-Mont., has proposed an exemption for remote sales of business inputs. Although an arguably necessary exemption, it will have a stalling effect on the MFA as interested parties debate the details of the exemption and what it might mean (in particular the definition of a business input). There is the potential for some groups to change their support of the bill.

So if the MFA fails to move this year, is there an alternate solution that should be explored? I read an interesting post on a LinkedIn board that suggested a roadmap for dealing with the state tax problems of remote sales that was drafted more than a half century ago. The post, written by James Sutton, a tax lawyer with Moffa, Gainor & Sutton P.A., suggests that the U.S. Congress has solved the problem of taxing made sales into a state, where the state does not have nexus to tax the transaction.

Sutton argues that Public Law Number 363 could be used as a model. Public Law 363 is sometimes referred to as the Jenkins Act and is codified at 15 U.S.C. sections 375 – 377. It requires any person selling, transferring, or shipping for-profit cigarettes or smokeless tobacco products in interstate commerce, to register and file monthly reports with the tobacco tax administrator of the state into which shipment is made no later than the 10th day of each month.

Sutton questions: “Why couldn't we do the same thing with remote sales? Just require the retailer to report sales into each state and let the states contact the purchasers for the use tax. Make the information reported be standardized so it is easy for the states to use. The states could do annual letter campaigns to taxpayers who made remote purchases and include an interest component (eventually a penalty).”

Would this be less of a burden on interstate commerce, while still enabling states to collect use tax on sales by remote sellers?

Practitioners seem on board with this type of solution and in many ways it makes sense. It would be less burdensome on remote sellers to have to comply with a single state’s sales tax system rather than attempting to comply with 45 states, even given the simplification that is supposed to occur with the Marketplace Fairness Act. Of course, the information needing to be reported would have to be simple and standardized across the states, but in essence, this type of solution could enable states to collect use tax from individual users, something states have argued in the past is too difficult.

Still, modeling a system after the Jenkins Act may not prove effective. A 2003 GAO report suggests that the federal government has limited involvement with enforcement of the act and while states have taken action to promote compliance with the Jenkins Act by Internet cigarette vendors, the results have been limited. The report indicates that “most Internet cigarette vendors do not comply with the Jenkins Act or notify their customers of their responsibilities under the act.”

Unfortunately, in the end, states aren’t looking for a simple solution and they aren’t concerned with how much they interfere in interstate commerce. They are looking for a politically feasible solution. As long as the collection of sales and use tax on remote sales somehow resembles a new “internet sales tax,” it will be a non-starter.

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