By Sean Higgins
Advocates of Internet sales taxes are trying again in Congress with new legislation that was proposed this week. The latest version includes a new wrinkle: It would allow states to audit an out-of-state business it suspects of attempting to avoid the sales tax collection system.
The legislation would allow creation of a multi-state compact that would require online sellers to collect the sales taxes that apply to the buyer living in a participating state. The sellers would remit the taxes to the local authorities where the buyer lives. Proponents of the legislation say the audit provision was meant to clarify a gray area in previously proposed bills, namely exactly how compliance with the sales tax collection system would be ensured.
A state would be allowed to audit a remote seller whenever "there is reasonable suspicion that the remote seller has engaged in intentional misrepresentation," according to the bill's language. Sellers that use a "certified software provider who shall have the responsibility to provide the state with complete records of transactions processed for the remote seller" would have various protections and little likelihood of being audited.
If you were a seller who didn't agree to use a certified software provider and your annual sales topped $5 million then things would be different, said Rachelle Bernstein, vice president and tax counsel of the National Retail Federation, which supports the legislation.
"If you are in [for example] Ohio and you sell the product to somebody in Virginia and the Virginia Department of Revenue thinks that you either didn't collect or didn't collect the right amount or whatever — I'm sure they wouldn't do it if it was just one transaction — but assuming you have a thousand transactions and it makes sense for them to want to go after this guy in Ohio and audit him and if he isn't using a certified software provider then he could be audited, yeah, absolutely," Bernstein said. It would be a strong incentive to get a certified provider, she added.
Asked if the legislation specified what would trigger a state audit or said what evidence would be required, Bernstein said, "Oh, no, no, no. It's state-by-state. The legislation is not changing [any] state's tax rules. I don't believe that you will even find even in a state's tax statutes when to audit. Those are decisions that are made by a department of revenue."
The sales tax legislation, titled the Remote Transactions Parity Act, was introduced Wednesday by Rep. Jason Chaffetz, R-Utah. It has bipartisan support, with co-sponsors including Reps. Steve Womack, R-Ark., John Conyers, D-Mich., Jackie Speier, D-Calif., Kristi Noem, R-S.D., Steve Stivers, R-Ohio, Peter Welch, D-Vt., and Suzan Delbene, D-Wash.
"A broad coalition of large and small businesses, online and brick-and-mortar retailers, and state and local government leaders asked Congress to modernize our nation's outdated sales tax collection framework. [The legislation] would modernize current law and strike the appropriate balance between sales tax parity and a state's right to manage tax policy within its borders," Chaffetz said.
Critics say the provision would allow states to harass businesses. "It opens the door to a grotesque expansion of state tax collection authority that is almost certainly unconstitutional, and places mandates upon the states that are probably unconstitutional as well," said Tom Giovanetti, president of the conservative Institute for Policy Innovation.
It's probably a moot issue. Advocates have been trying to get an interstate sales tax collection bill through Congress for more than a decade without success. Efforts to create a sales tax regime have been stymied by a 1992 Supreme Court decision called Quill that said because online sales are mostly interstate, states could collect taxes on them only if Congress gave them explicit authority to do so. Congress never has.
The tax system has been advocated by an ad hoc coalition of state and local government organizations and traditional "brick and mortar" retailers. The government organizations say they have lost out on millions of dollars of tax revenue because there is no system to require sales taxes to be paid. The retailers say online businesses have an unfair advantage because of that.
The last Congress seemed like the coalition's best opportunity in years, but their push still fizzled out. A version passed the Senate, and a House sales tax bill was attached to a bill renewing a ban on Internet access taxes. Supporters had hoped the access tax ban was popular enough to pull in House Republican lawmakers who would otherwise oppose a sales tax. The supporters miscalculated and the entire bill died. Last week, the House overwhelmingly passed a standalone bill to permanently ban access taxes.
With both the Senate and the House now having Republican majorities, the chances of passage of any bill ensuring higher tax collection is unlikely. Both House Speaker John Boehner, R-Ohio, and Senate Majority Leader Mitch McConnell, R-Ky., have opposed similar legislation in the past. A GOP leadership aide who requested anonymity said, "I don't see this issue going anywhere."