Risk & Compliance

Sales Tax Bill Seeks to Ease Online Retailer Burdens

The new sales tax bill would trim 10,000 taxing authorities down to 46.
David KatzJune 17, 2015

A new House bill giving U.S. states the power to require out-of-state retailers to collect taxes from consumers would ease the compliance burdens of CFOs and tax managers of such firms, according to a staffer for Rep. Jason Chaffetz, the Utah Republican who is the lead sponsor of the the bill.

Rep. Jason Chaffetz

Rep. Jason Chaffetz

Finance chiefs “need to know that the compliance burden is going to be smaller for them under our bill than it would be long term, as states continue to do this ‘tax grab,’ where they continue to pull resources in from outside the state lines,” the Chaffetz aide said.

“The compliance under our bill is going to be much more streamlined,” according to the staff member. “We’re trying to provide certainty that businesses aren’t finding when it comes to tax reform generally.”

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Currently barred under 1967 and 1992 U.S. Supreme Court rulings from collecting potentially huge amounts of tax dollars due on out-of-state purchases, many states are looking to pass legislation that provides them with ways to pick up some of that revenue.

Further, U.S. senators and representatives have recently introduced legislation that would enable states to require online retailers to collect so-called “use” taxes (taxes on sales made by out-of-state retailers) from consumers and remit them to the states.

In all but five states, only businesses with a clearly defined physical presence in the state are required to collect sales taxes from their customers. The Chaffetz Bill, called the  “Remote Transactions Parity Act of 2015,” which was introduced on Monday, and the  Marketplace Fairness Act, introduced in the Senate in March, would enable states to require out-of-state sellers to collect taxes from consumers based on rates set in the state where the consumer lives.

By contrast, under a proposal distributed in January by Rep. Bob Goodlatte, of Virginia, a Republican and the chairman of the House Judiciary Committee, states could require out-of-state sellers to collect taxes based on rates set where the vendor is located.

One of the big sticking points of changing the current system to give states the power to require out-of-state retailers to collect taxes from their customers is the potentially huge administrative workload of having to comply with the rules of many of the nation’s taxing jurisdictions. In fact, including cities and towns and other local governments, there are 9,998 sales tax jurisdictions, according to the Tax Foundation, an independent tax policy research outfit.

The Chaffetz bill, however, would limit the taxing jurisdictions to “a single entity within the state responsible for all state and local sales tax administration,” according to a fact sheet on the bill. That means that the number of taxing administrative bodies would be reduced to 46 — the number of states that currently charge sales and use taxes.

Further, in the 24 of those states that have signed onto the Streamlined Sales and Use Tax Agreement, each out-of-state retailer would need to file only a single tax return covering all the jurisdictions in the state during each taxing period. (The SSUTA is a multistate agreement adopted in 2002 for the administration and collection of sales and use taxes.)

Another issue the Chaffetz bill is attempting to address is that if small to mid-sized out-of-state retailers can be taxed, they can face audits by many states simultaneously. The legislation, however, would eliminate state audits for remote sellers with less than $5 million in gross annual receipts, unless the state administrator suspects the retailer has engaged in intentional misrepresentation or fraud.

Instead of auditing such out-of-state retailers directly, states would audit the firm’s tax collection efforts via a certified service provider (CSP) picked by the retailer. In the 24 states signed on to SSUTA, in fact, online retailers can already get free software and services from those certified providers. Such states can pay CSPs commissions to collect sales and use taxes and file tax returns for out-of-state merchants.

By contrast, Goodlatte’s plan would eliminate the Chaffetz requirement that remote retailers use service providers. Proponents of the Goodlatte measure also say that the Chaffetz bill would exact heavy expense burdens on small online retailers.

“Our primary concern with [the Marketplace Fairness Act and the Chaffetz bill] is that [they place] unfair burdens on remote retailers by imposing huge costs,” according a June 15 letter written to Goodlatte by the True Simplification of Taxation coalition, which represents a number of marketing and retail associations.

“While some critics say that ‘free’ compliance software will ease that burden, many small and mid-size retailers will pay tens of thousands of dollars to have their systems integrated with this software and to maintain it each year,” according to the letter.