The National Governors Association (NGA) urges Congress to level the playing field between out-of-state and in-state retailers by authorizing states to require remote vendors to collect state sales taxes.
Specifically, governors are encouraged by the introduction of the “Main Street Fairness Act”, (H.R. 2071 and S. 1542), the “Marketplace Equity Act,” (H.R. 3179), and the “Marketplace Fairness Act” (S. 1832). Although different, each bill would authorize states to require the collection of sales taxes in return for the implementation of tax simplifications that can help all businesses and create fairer competition for consumers.
For states, each bill represents the opportunity to collect more than $22 billion in sales taxes that are already owed by consumers, but not collected. This collection gap was created by U.S. Supreme Court rulings in Bellas Hess v. Illionis and Quill Corp. v. North Dakota that say a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state. Consequently, the requirement to pay taxes on remote sales falls to consumers in the form of “Use” taxes, which are filed with year-end tax returns and are often complied with as an exception rather than a rule.
This problem is compounded by the explosive growth of the Internet, which allows remote businesses to compete with local brick and mortar stores for local customers. During the recent recession, Internet sales continued to grow at a double digit rate with total sales expected to exceed $250 billion by 2014. As such, the Internet encourages tax avoidance; the lack of an effective system to collect sales taxes at the time of purchase causes many Americans to incur – but not pay – the taxes they legally owe.
NGA calls on Congress to examine the different proposals pending before it and move ahead with legislation that will help states modernize their sales tax systems and bring them into the 21st century. Specifically, NGA recommends that the legislation include a specific and clear grant of authority to states to require remote vendors to collect sales taxes; provide a small business exception that exempts genuinely small businesses from collection requirements; avoid impinging on states’ authority to establish or remove a tax or set rates it finds appropriate; and not limit state authority over other forms of state taxation.
The Streamlined Sales and Use Tax Project (Project) was initiated by NGA and the National Conference of State Legislatures in the fall of 1999. The goal of the Project was to find solutions for the complexity in state sales tax systems that resulted in the U.S. Supreme Court holding that a state may not require a remote seller without a physical presence in the state to collect tax on sales into the state.
As a result of these decisions, local brick-and-mortar stores operate at a competitive disadvantage with remote sellers who do not collect sales taxes. Local stores find themselves serving as showrooms for Internet and catalog sellers. Prospective customers check out the merchandise locally then buy the product online or through a catalog to avoid paying sales tax.
To address this problem, the Project generated the Streamlined Sales and Use Tax Agreement (SSTA), a cooperative effort of 44 states, the District of Columbia, local governments and the business community to simplify sales and use tax collection and administration by retailers and states. The SSTA minimizes costs and administrative burdens on retailers that collect sales tax, particularly retailers operating in multiple states. It also encourages "remote sellers" selling over the Internet and by mail order to voluntarily collect tax on sales to customers living in states that comply with the SSTA.
To date 1,736 retailers have volunteered to collect sales tax in Streamlined states and have remitted more than $900 million in sales taxes that would previously have gone uncollected. This amount, however, pales in comparison to what could be collected under a nationwide system authorized by Congress through federal legislation.
NGA has supported several different bills over the years to grant states collection authority over remote vendors. As stated above, NGA’s support for legislation is not tied to specific legislation, but to core elements that governors believe should be part of any federal grant of authority to states.
First, federal legislation must specifically grant authority to states to require remote vendors to collect sales and use taxes on sales of taxable products and services into their jurisdiction. More importantly, since the grant of authority is tied to meeting certain simplifications, the legislation should recognize the efforts of states which are compliant with the SSTA by granting them the authority to collect immediately. If an alternate path is offered for non-SSTA states, the requirements must be clear so as to avoid litigation when the state makes changes to gain collection authority.
Second, the legislation should include a de minimis or small business exception that exempts genuinely small sellers from the collection requirements. While governors have never specified a level for the small business exception, the size of the exception should be sufficient to relieve the smallest businesses from collection authority, but small enough to ensure the exception does not swallow the rule. Any exception will preserve a portion of the tax collection gap states are working to close. NGA encourages Congress to set a low small business exception while allowing states to increase the exception as appropriate.
Third, the legislation should not dictate rates or mandate the existence or removal of a sales tax. The ability of a state to manage its own fiscal system is at the core of state sovereignty and our federal system. States should be given maximum flexibility to determine the structure and level of taxation while meeting certain simplifications that promote efficiency and enhance the ability of sellers to collect and remit sales taxes.
Fourth, NGA will oppose efforts to combine collection authority with new limits or restrictions on a states’ authority over other forms of taxation. Bills such as the Business Activity Tax Simplification Act (H.R. 1439) are antithetical to efforts by states to modernize their tax systems because they seek to revert other tax nexus requirements back to a physical presence standard from which sales taxes are trying to evolve. This and other efforts which would effectively reduce state taxes through federal legislation should not be the cost-of-doing-business for modernizing state sales tax systems.
The National Governors Association supports congressional efforts to grant states collection authority over remote vendors because it will help states close a tax gap that is costing states billions every year, help small businesses comply with the law and expand their business and assist consumers through fair competition.
At a time when states have already closed budget gaps of $325 billion from fiscal years 2009 through 2012, and still face gaps of at least $40 billion for fiscal year 2013, collecting taxes owed means more money for basic services such as roads, schools, teachers and police officers without increasing the federal deficit.
For business, it means that the corner store is on the same footing with the online retailer. In other words, the local sporting goods store that sponsors the neighborhood little league team has the same requirement to collect sales taxes as the big online merchant. It also means that corner store can grow its business more easily. Simplified tax requirements make doing business easier by reducing risk and creating opportunity.
The legislation also helps consumers. Fair competition means more choice. The success of electronic commerce should not mean the death of Main Street. Instead, our laws should set the stage for all businesses to compete and succeed.