By: Denise M. Champagne//March 19, 2014
By: Denise M. Champagne//March 19, 2014//
Congress is looking at ways for states to collect sales taxes on the growing number of items being sold online by out-of-state companies.
The pros and cons of the Marketplace Fairness Act were discussed last week by members of the House Judiciary Committee, who also heard testimony on alternative solutions.
The proposed act, passed by the Senate last year, would allow state governments to collect sales and use taxes from remote sellers with no physical presence in their states.
It is supported by William E. Moschella, a shareholder in the Denver-based law firm Brownstein Hyatt Farber Schreck LLP, which represents the Simon Property Group, the largest owner operator of shopping malls in the U.S.
Moschella compared the proposal to alcohol regulation in which state attorney generals were given authority, under the 21st Amendment Enforcement Act of 2000, to seek injunctive relief against those engaged in the act of interstate shipment of licensed beverages in violation of state law.
He said among the reasons cited for supporting the Enforcement Act was that direct sales over the Internet, through catalogs and such, circumvented state sales and excise taxes.
“All the elements discussed in 2000 — Internet retailers, direct shipments and failure to collect state taxes — are all at work here,” Moschella said. “That is why the Webb-Kenyon and the Enforcement Act are an applicable precedent upon which to build a solution.”
James H. Sutton Jr. said if the Marketplace Fairness Act were to pass, he believes it will cripple thousands of businesses and the economy, partially from the uncertainty and litigation that will result.
Sutton is a certified public accountant and partner in the Florida law firm of Moffa, Gainer & Sutton PA. whose practice is devoted almost entirely to a sales and use tax controversy in a state with projected sales tax revenues of more than $22 billion for this fiscal tax year.
Sutton said forcing states to collect sales taxes gives them jurisdiction over remote sellers and would obliterate the Commerce Clause, which he said makes sure commerce flows freely between the states without being overburdened by some state regulations.
Sutton agrees something unfair is happening to brick-and-mortar stores, but said remote sellers are not causing the problem. He puts the blame on states for not enforcing use taxes on their residents and proposes federal consumer private reporting, or CPR, that would require remote sellers to provide sales information to states and purchasers so self-reporting of use taxes can become common place nationwide.
That, Sutton maintains, would place the least burden on interstate sellers, compensate remote sellers for time and expense and allow states to keep their sovereign rights without impeding on the rights of purchasers.
Judiciary Committee Chairman Bob Goodlatte, R-Va., noted shopping center foot traffic has dropped 50 in the last three years. He cited decisions by JCPenney Stores and RadioShack to close 33 and 225 stores, respectively, resulting in the loss of thousands of jobs, as reasons for “Exploring Alternative Solutions on the Internet Sales Tax Issue.”
The hearing, conducted March 12, featured six witnesses, each testifying about alternative solutions being considered.
Goodlatte is also opposed to the Marketplace Fairness Act. He cited Quill Corp. v. North Dakota, 504 US 298, a 1992 Supreme Court decision he said reaffirmed a long-standing rule that sellers cannot be forced to collect sales taxes for states in which they have no physical presence because compliance would unduly burden interstate commerce.
Goodlatte said consumers in the 45 states that collect sales taxes, including New York, still owe the state if the revenue is not collected by the state, but that the “use tax” is widely ignored by consumers and not enforced by the states, which estimate annual lost revenue at $23 billion.
Rep. John Conyers Jr., D-Mich., ranking member, said state governments rely on sales and use taxes for about one-third of their total revenue, but are receiving less for services such as education, police and fire and highway safety because more Americans are shopping online.
Stephen P. Kranz, a partner in the Washington, D.C. law firm of McDermott Will & Emery LLP who has spent most of his professional career dealing with state and local tax issues, said Congress can either exercise its authority under the Commerce Clause to provide a framework under which states can enforce collection by remote sellers or do nothing. He said no matter what it does, states will continue to try forcing remote sellers to collect their sales taxes which will result in more litigation, expenses and uncertainty for remote sellers and consumers.
Other topics discussed included origin sourcing, in which tax rates would be based on those where the products originate, not the state where the product is shipped; simplification of the sales and use tax system; and the Streamlined Sales and Use Tax Agreement.
Rep. Howard Coble, R-N.C., expressed concern origin sourcing could be seen as a tax increase to consumers living in states with lower or no sales taxes.
Rep. Jerry Nadler, a New York Democrat, said the Internet has compromised states’ abilities to collect taxes and regulate business in their states.
He said he supports the Marketplace Fairness Act and hopes the committee will hold hearings to address its criticisms and possibly make amendments. Nadler also said he disagrees with state governments being encouraged to compete with one another to keep tax rates low. He said that is a political decision for individual states and their electorates; that the federal government should be neutral.
A video of the hearing is available on the committee’s website at www.judiciary.house.gov.