Tax Analysts Blog

Solving the ‘Problem’ of Remote Sales

Posted on Apr 23, 2014

Movement on the Marketplace Fairness Act (MFA), which would enable states to require remote sellers to collect sales tax, has been the source of much speculation. The bill is pending in the House Judiciary Committee, but interest in the topic remains high, even among members of the committee. Thirty-seven of the 40 members were at the March 12 hearing. There is also some thought that if Rep. Jason Chaffetz, R-Utah, introduces a bill (which will likely look similar to the Senate bill with a few changes), it has a decent chance of passing.

Those inside the state and local tax community remain doubtful that the MFA will move this year. I’m on the fence. The bill is better positioned now than ever before. Legislators have started to focus on issues (such as the debate between origin and destination sourcing) rather than discussions of whether the MFA would create a new tax. There has also been an acknowledgment by legislators that the “problem” of Internet sales is not going away, so perhaps it is time to address it. My real worry is that the MFA will be enacted and we will have to face the reality that the bill will be very difficult to administer.

But perhaps the “problem” could be addressed without the MFA. A recent article in State Tax Notes offers an alternative solution. The author, James Sutton, calls it consumer private reporting, or CPR. Under CPR, remote sellers would be required to report taxable remote sales to the state. Sellers would provide a “simplified whole dollar amount of taxable purchases in a Form 1099-style format to both the state and the purchaser to facilitate use tax payment.” Reporting would be done by the seller or through approved software vendors.

While no system is perfect, and critics of a CPR system have raised several privacy concerns, the idea behind it makes sense. We already have an established sales and use tax system, under which consumers pay either sales or use tax on purchases of taxable goods and services. We also already have a U.S. Supreme Court opinion that established that a seller must have a physical presence in the taxing state before that state can require it to collect and remit sales tax. When the seller does not have nexus with the taxing state, the consumer is required to pay use tax. But consumers don’t voluntarily remit use tax when the seller isn’t required to collect sales tax. The problem, then, is that states cannot enforce the use tax.

Still, while times have changed since Quill Corp. v. North Dakota was issued in 1992, the fundamental idea that it is burdensome to expect a retailer to comply with state and local sales tax requirements in states where it did not have a physical presence has not changed. A physical presence sales and use tax nexus standard makes sense and is good law. As the Quill court noted, a clear rule “establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes.”

All things being equal, I would rather enforce the use tax than needlessly broaden the sales and use tax nexus standard. States have already pushed the boundaries of what is permitted by the U.S. Constitution and specifically set forth in Quill. The result has been uncertainty and confusion regarding nexus standards. The MFA is a complicated solution and allows states to require remote sellers to collect and remit sales tax even if they have no physical presence in the taxing state. If a CPR system or something similar could be a workable alternative to the MFA, it is certainly worthy of debate.

Read Comments (3)

emsig beobachterApr 23, 2014

The principle reason for imposing sales/use tax collection and remittance
requirement on sellers is efficiency. It is far more efficient for revenue
agencies to deal with a finite number of sellers than a much larger number of
consumers. That is, the cost of collection per dollar of tax revenue collected
is much lower when the revenue is collected and remitted by sellers. In
addition, the sellers would still have the costs of reporting all this data and
information to consumers and the appropriate revenue agencies. How would they
be audited?

I predict that if the CPR were adopted, the voluntary consumer rate of
compliance would soar from near zero to something slightly above zero. The
reason the voluntary rate of compliance is high is due to third party reporting
and collection -- most income tax revenues are withheld and remitted by
employers.

The world has changed significantly since 1992 when the Quill decision was
handed down. There are far more efficient ways to significantly reduce
compliance costs for sellers and for state revenue agencies now than there were
22 years ago.

P.S. There are a number of people who believe that physical presence for nexus
is not good law now; nor was it particularly good law 22 years ago.

Annette NellenApr 26, 2014

I also support continued efforts to be sure consumers and businesses know of
their use tax obligations and that states make it easy to comply with use tax.
Even with the MFA, there would still be use tax obligations. For example, if
you buy from a vendor located outside of the U.S. or from a vendor who falls
under a de minimis rule and does not have to college use tax.

There is still challenges with vendor reporting because the vendor still has to
figure out what is taxable in the particular state and that can be complex
(easier with software, but that is not cheap and you still need someone to run
it).

Perhaps an alternative would be for vendors to have to have a "my account" on
their website where customers can easily see their purchases for the year. Then
the consumer can easily get the data. Amazon has been doing this for years and
I have found similar accounts on other vendor websites I use.

California and a few other states use a "look-up" table for consumers so they
don't even need to keep records of purchases if they prefer not to (unless an
item costs over $1,000). If more states did this, there would be no need for
vendor reporting of customer purchases for the year.

States need to do more to educate their resident individuals and businesses
about use tax obligations, how paying it helps the state (and can keep the
state from having to increase other taxes).

edmund dantesApr 27, 2014

Personally, I find the idea of a CPR system disgusting. I do not want my
purchase history in the hands of any state employee. They have proven
themselves to be unreliable information stewards time and again, and even
notorious invasions of privacy during election season go largely unpunished.
CPR is a terrible idea.

The idea of a "use tax" is nearly as bad. I have spoken to many otherwise
educated people who have no idea what the use tax is. Once I explain it, they
have no idea why they should pay it. If they go to the effort of finding a
vendor outside the reach of sales tax authorities, they generally believe they
are entitled to reap the reward of dodging the sales tax bullet. They uniformly
do not consider this "tax cheating." Any more than Massachusetts residents
thought it was "tax cheating" when they went to New Hampshire to buy booze.

It's time to bring taxation systems into conformity with the values of ordinary
citizens, and to create systems in which compliance by anyone with a high
school education is trivial. We don't have that now.

Submit comment

Tax Analysts reserves the right to approve or reject any comments received here. Only comments of a substantive nature will be posted online.

By submitting this form, you accept our privacy policy.

* REQUIRED FIELD

All views expressed on these blogs are those of their individual authors and do not necessarily represent the views of Tax Analysts. Further, Tax Analysts makes no representation concerning the views expressed and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, fact, information, data, finding, interpretation, or opinion presented. Tax Analysts particularly makes no representation concerning anything found on external links connected to this site.