Marketplace Fairness Act Update: On March 12, the House Judiciary Committee held a hearing to consider alternative proposals to the Marketplace Fairness Act (MFA), which passed the Senate with overwhelming support in May of 2013. The House hearing entitled “Exploring Alternative Solutions on the Internet Sales Tax Issue” focused on potential alternatives the Senate bill. A panel of six sales and use tax experts were questioned about five alternative solutions.
Andrew Moylan, senior fellow at the R Street Institute, proposed an “origin sourcing” model for taxing remote sales. Under this method sales tax is determined by the location of the seller, as opposed to the predominant system where tax is determined by the consumer’s location. The committee examined the flaws of this proposal, finding that origin sourcing was a drastic change to current tax collection methods and surely would have unknown pitfalls. It was argued that origin sourcing would likely encourage states to “race to the bottom” for the lowest tax rate.
Finally, origin sourcing was found to risk taxation without representation because it would impose state sales tax laws on out-of-state consumers. As a result, Rep. Jason Chafetz concluded that the proposal was “dead on arrival.”
Next, the panel considered increasing consumer information reporting and enforcing the use tax more efficiently. Essentially, this solution would shift the burden away from vendors to the consumer via a 1099 style report. States would collect tax by enforcing the individual requirement to track and remit the use tax owed when purchasing from a remote vendor. However, the panel criticized the proposal for its potential to violate consumer’s privacy rights and placing an unnecessary burden on the consumer.
William Moschella, a shareholder at the law firm of Brownstein Hyatt Farber, provided a somewhat radical alternative, suggesting that Congress could use its Commerce Clause power to prohibit the shipment of goods that violate the sales tax laws of the state to which the goods are shipped. This method was later identified as dangerous to commerce and analogized with allowing states to erect fences to protect their taxing power. The proposal received little attention from the committee.
Finally, Joe Crosby, a principal at MultiState Associates, Inc. suggested that the Marketplace Fairness Act was an appealing solution. The software proposed by the MFA would integrate with most software systems, could file all returns, and provided immunity from audits. Further, the software is robust enough to handle differences in state taxing methods. As a result, implementing the MFA is likely to allow continued diversity while limiting the liabilities and burdens of the current system.
In conclusion, Stephen Kranz, partner at McDermott Will & Emery suggested that the only real alternative to the current system is simplification and uniformity through technology. Accordingly, he urged the panel not to focus on alternatives to the MFA, but rather on how to modify the MFA to address concerns about simplify, state sovereignty and software integration with existing systems.
Christopher D. Saddock, LL. M., J.D., practices business and individual tax planning. He focuses on financial transaction taxation, partnership taxation, income tax accounting, and serves as a family office advisor for the firm’s high net wealth clients.