Online Sales Tax Debate – Still Going On?

Monika Miles

For several years, the online sales tax debate has been tossed around Capitol Hill, but has gained little traction in Congress. However, two new bills introduced recently add some new fodder for discussion. One bill makes it harder to impose sales tax, while the other makes it much easier. Will either pass?

No Regulation Without Representation

Representative Jim Sensenbrenner, a republican from Wisconsin, introduced a new bill to Congress in July that would prevent states from taxing any seller lacking a physical presence. This bill is called the No Regulation Without Representation Act of 2016 (H.R. 5893).

Under this bill, unless the person is physically present in a given state during the relevant tax period, a state may not obligate a person to:

  • Collect a sales, use or similar tax
  • Report the sale
  • Assess a tax on a person
  • Treat the person as doing business in a state for purposes of such tax

H.R. 5893 would also set forth a de minimis physical presence, whereby “physical presence” does not include any of the following:

  • Referral agreements with in-state persons who receive commissions for referring customers to the seller
  • Presence for less than 15 days in a taxable year
  • Product delivery in-state by a third-party
  • Internet advertising services not exclusively directed towards, or exclusively soliciting, in-state customers

If this bill gets through Congress, it would be a break-through in the online sales tax debate, making it much more difficult for states to assert nexus and thereby require sales tax collection.

Online Sales Tax Simplification Act of 2016

After much anticipation, on August 25, Congressman Bob Goodlatte, a republican serving Virginia’s sixth Congressional district, introduced a draft copy of his Online Sales Tax Simplification Act of 2016. This one takes an opposing approach to the bill mentioned above.

For sales made to states outside a retailer’s home state:

  • Merchants will collect tax at a flat rate set by the state of the customer.
  • Merchants will follow the rules of their home state as to what products are taxable- information and formulas e-retailers would already have in place for in-state sales.
  • E-retailers would remit the collected taxes to their home state revenue office, which would then turn the out-of-state money over to a clearinghouse for distribution to the states. As such, it would allow e-retailers to remit the collected monies to their home state revenue office in the same manner they already remit taxes collected on in-state sales.
  • E-retailers would have to report how much was collected for each state to their revenue office.
  • There are no exceptions for small sellers in the Online Sales Tax Simplification Act of 2016. This is in contrast to previous failed bills, which offered some accommodation for small e-retailers.

Steve DelBianco, executive director of NetChoice, says that terms of the draft bill are “so simple there is no need for an exemption” for smaller retailers. NetChoice is a group that represents e-retailers and has actively participated in developing the bill’s key points. The Marketplace Fairness Act, which passed the Senate in May 2013 before dying in the House, exempted companies that have $1 million or less in remote sales within the United States. The Remote Transactions Parity Act (RTPA) proposed exempting in the first year retailers with less than $10 million in U.S. online sales, then in the second year the act would have lowered the exemption to $5 million, and then to sellers with less than $1 million in web sales in the third year. However, the RTPA also said any seller who sells through an online marketplace—such as through eBay Inc.’s or Inc.’s marketplaces—would be required to collect sales tax right away.

“The elegant simplicity of this approach for analog and online sellers is that they will now treat all their customers as if they strode up to the front door and made a purchase,” says DelBianco. The only difference would be that the e-retailer charges the shopper tax at the single rate determined by the consumer’s home state.

We tend to scoff at the notion that anything drafted by the government has “elegant simplicity” or that small retailers shouldn’t be offered an exemption. Sales tax is still complex! And in our experience, most middle market companies don’t have the bandwidth necessary to deal with even the varying rate of the 50 states. We contend that a small seller exception should still be considered. “Elegant simplicity?” Really?

Stay tuned to our blog in the upcoming weeks for further updates on the online sales tax debate.

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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