Creating a federal law to increase use tax compliance is not a new idea. As far back as the famous Quill case, the Supreme Court stated, “Congress is now free to decide whether, when, and to what extent States may burden interstate mail-order concerns with a duty to collect use taxes” (Quill Corp. v. North Dakota, 504 U.S. 298, 318 (1992)). Currently, congressional committees are developing two potential bills that address use-tax issues: the Marketplace Fairness Act (MFA) and Remote Transactions Parity Act (RTPA). This article examines the major provisions in these two bills and highlights their differences.
Use tax is imposed on consumers who buy products that should have been subject to sales tax, but were not, often because the products were bought by consumers from out-of-state retailers. What was once a big issue involving catalog sales has become an enormously costly problem for states now that consumers shop on the internet.
Marketplace Fairness Act of 2015
In the not-too-distant past, a previous version of the MFA almost became law. On May 6, 2013, the Senate of the 113th Congress passed the 2013 version of the bill (S. 743), 69–27. It received bipartisan support, with 46 Democrats, two Independents (including future presidential candidate Bernie Sanders), and 22 Republicans. The nays were also, somewhat, bipartisan with the majority being Republicans (including future presidential candidates Ted Cruz, Rand Paul, and Marco Rubio), along with five Democrats. The five Democrats who voted against the bill came from Montana (both), Oregon (both), and New Hampshire, none of which had a sales tax at the time and would not have benefited from the bill.
Despite its popularity in the Senate, the bill never gained much traction in the House of Representatives. It never came out of committee to a vote on the House floor.
The 2013 version was not the first time MFA had been introduced, however. Sen. Michael Enzi, R-Wyo., introduced it in November 2011 in the 112th Congress (S. 1832). It had its roots in another piece of federal legislation aimed at sales/use tax collection, the Main Street Fairness Act, which had been introduced in 2010. The latest version of the bill (S. 698) was referred to the Senate Finance Committee, where it still sits as of April 19, 2016.
The MFA of 2015 creates a destination-based collection system for the sales/use tax when the vendor and customer live in different states, in which the amount of tax due is based on the location of the buyer. More specifically, the tax due is based on the sales tax rate in the location where the buyer receives the product (or service), if it is known. The MFA allows qualifying states to require all out-of-state vendors to collect and remit the tax due for sales sourced to their state. To be a qualifying state, the individual state must be either (1) a member state under the Streamlined Sales and Use Tax Agreement (SSUTA) or (2) meet the simplification alternative in the bill. Currently, SSUTA has 24 member states. The MFA also has a requirement that future changes to SSUTA cannot violate the simplification alternative.
The simplification alternative in the bill is similar to the qualifications for being a Member State under SSUTA. Specifically, a state must provide:
- A single entity within the state that will handle all sales/use tax administration (at both the state and local level), processing of the returns, and audits for remote sales;
- A single audit of a remote seller for the state and all local taxing jurisdictions within that state; and
- A single sales and use tax return (form) to be used by remote sellers.
The MFA also requires that the state create a uniform sales and use tax base among the state and local tax jurisdictions. The state must also provide software free of charge, from certified software providers, to remote sellers to help with compliance. In addition, the state must provide safeguards to the vendor for software errors. The certification process for software providers occurs at the state level, and currently six certified providers are listed on the SSUTA website. Finally, a state can start requiring out-of-state vendors to collect and remit the sales/use tax on the first day of a calendar quarter that is at least six months after the vendors meet the requirements of the simplification alternative.
There is a small-seller exception in the MFA. A remote seller qualifies for the exception if it has gross annual receipts in total remote sales under $1 million. Two important points are that the test is gross receipts instead of net receipts and that the $1 million applies to total remote sales, not total sales. If a business qualifies for the small-seller exception, it does not have to collect and remit the sales or use tax on out-of-state sales. Another caveat of this provision is that gross annual receipts from remote sales for multiple people and/or entities must be aggregated if they are related parties under Sec. 267 or 707(b)(1). For example, if a brother and sister are both operating businesses independently of one another, and each has $750,000 in gross out-of-state sales, then neither would meet the small-seller exception because they are related parties and, in aggregate, have $1.5 million in gross out-of-state sales. Also, a person with one or more businesses may have to aggregate the businesses if the primary purpose of forming the various entities was to avoid collecting the tax (e.g., a clothing website breaks into two businesses—clothing for men and women).
There are several other smaller provisions in the bill as well. One of the interesting provisions is that Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands are included in the definition of states in the bill and thus can also require remote sellers to collect and remit sales/use taxes (for those wondering, the Northern Mariana Islands sales tax rate is currently 0%).
If the MFA becomes law, states could begin to require collection one year after enactment assuming that the one-year period ends before Oct. 1. If, however, the enactment date is between Oct. 1 and Dec. 31, the state would have to wait until Jan. 1 of the second calendar year following enactment to begin requiring collection.
Remote Transactions Parity Act of 2015
A second bill in Congress, introduced by Rep. Jason Chaffetz, R-Utah, is known as the Remote Transaction Parity Act (H.R. 2775). It was introduced in the House of Representatives on June 15, 2015. On July 1, 2015, it was referred to the Subcommittee on Regulatory Reform, Commercial and Antitrust Law (the same subcommittee where the 2013 version of the MFA died).
Much like the MFA, the RTPA attempts to create a destination-based system for collecting sales/use tax. Both start with SSUTA member states, and states meeting the simplification alternative can require out-of-state vendors to collect and remit the sales/use tax. The MFA and the RTPA are so similar that most assume they are identical except for their legislative origin—the Senate vs. the House. But the two bills are not identical. Starting with the name, the word fairness has been replaced with parity. This might seem minor, but since 2009 these type of bills have always had the word “fair” in them (Main Street Fairness Act; Marketplace Fairness Act). (Insert your own joke about any tax bill being “fair.”)
There are, of course, more substantive differences. First, the small-seller exception provisions are different. The most well-known of these differences is that RTPA has a phased-in threshold of gross annual receipts (as opposed to just one amount in the MFA). The threshold for the small-seller exception under the RTPA would be $10 million, $5 million, and $1 million in gross annual receipts in the first, second, and third calendar year following the effective date, respectively. The related party and individuals with more than one business rules discussed above also apply in aggregating gross receipts.
In addition, the RTPA’s small-seller exception provision includes a rule stating that a business that “utilizes an electronic marketplace for the purpose of making products or services available for sale to the public” cannot qualify for the exception. The bill defines an electronic marketplace as a platform where products or services are offered for sale by more than one remote seller, and where buyers may purchase the products through a common financial transaction processing system (e.g., at Amazon.com). This provision could have huge ramifications for a business that sells through both its own website and on websites such as Amazon.
A second major difference is the limitation on audits of remote sellers under RTPA. A state may not audit a remote seller with less than $5 million in gross annual receipts unless there is a reasonable suspicion of intentional misrepresentation or fraud. As an interesting side note, the bill also states an audit cannot be performed by a person whose compensation depends on the outcome of the audit. The bill also establishes a statute of limitation on assessment of three years after the later of the due date or the filing of the sales and use tax return applicable to the sales and use tax assessed.
A third difference is that the RTPA appears to put more onus on the certified software provider. If the state feels an audit is in order and the remote vendor has used a certified software provider, then, at the request of the vendor, that software provider must provide the state with all applicable records, represent the vendor during an audit, and will be held responsible for the audit findings (there are safeguards for the software provider if the vendor gave the provider false or misleading information). The vendor can opt out of having the software provider representation and/or the vendor can contest any audit findings.
Finally, the RTPA includes language about what to do if a person other than the state wishes to pursue action against the out-of-state vendor for over- (or under-) collection of the sales/use tax. This, presumably, would be the individual purchasing the product.
There are several other minor differences. For example, the RTPA requires states to provide remote sellers with compensation equal to what they pay non-remote sellers (e.g., tax incentives for remitting tax on time). The RTPA also provides guidance on how states should certify software providers. A final difference is that states meeting the simplification alternative under the RTPA must wait 180 days to begin collecting the tax after meeting the requirements (versus six months under the MFA).
In addition to the MFA and RTPA, pay attention to Robert Goodlatte (R-VA), chairman of the House Judiciary Committee. He has championed an origin-based system. His perpetually-soon-to-be-but-not-yet-introduced bill is titled the Online Sales Simplification Act of 2015. It would be in stark contrast to the MFA and the RTPA in the sense that vendors would collect the sales/use tax based on their state’s tax rates and remit that amount to a clearinghouse. The clearinghouse would then send the amount to the state where the customer is located.
Conclusion
Although neither bill appears close to becoming law, that can change quickly, especially considering the upcoming November election. Even if neither one of these current bills ever become law, the odds are very good that any future destination-based use tax law will resemble one of these two.
Christopher R. Jones, Ph.D., CPA, and Yuyun A. Sejati, Ph.D., are both assistant professors of accounting at University of Wisconsin–Oshkosh.
