Wednesday’s hearing before the House Judiciary Committee underscored the complexities of determining a solution for the Internet sales tax issue that will allow states to collect sales taxes from out-of-state vendors. While the hearing showed only minor dissent amongst the panelists about whether these taxes are payable to state treasuries, which seemed to be largely a matter of semantics, there was no clear consensus on how this could be accomplished with the least burden for sellers, vendors and state tax collectors.
Last spring, in a rare bipartisan effort, the Senate passed the “Marketplace Fairness Act,” which would compel online and catalog retailers (remote sellers), no matter where they are located, to collect sales tax at the time of a transaction and remit to the state where the customer resides.
The bill then went to the House Judiciary Committee, where Chairman Bob Goodlatte (R-Va.) proposed his own seven “Basic Principles on Remote Sales Tax,” making it known that he wanted to develop an alternative to the Senate bill that would be guided by these principles. However, there was no clear indication from today’s hearing as to how this would be accomplished.
Like Goodlatte, CompTIA has reservations concerning the “Marketplace Fairness Act.” This bill, like similar legislation proposed over the last few years, attempts to solve state tax collection issues by shifting the collection and reporting burden to businesses. This would pose a huge new compliance burden for small businesses, which would incur both startup and maintenance costs in assuming this new role as tax collector for foreign states. Future compliance costs are also a major concern, as these small businesses would have to report and remit sales taxes to a multiplicity of states.
While the Senate bill did include a small seller exemption for businesses that have $1 million or less in remote sales, CompTIA has taken the position that an exemption should focus on the size of the business. Instead of a small-seller exemption, the legislation should provide a small-business exemption, because small businesses are less capable of bearing the incremental costs of new tax compliance burdens.
As work continues to develop a legislative solution, we again emphasize that special attention must be given to the adverse effects of shifting the collection and compliance burden from individuals to businesses. In a perfect world, any new system would be simple and inexpensive for small businesses. However, in reality, we believe these new compliance costs will stifle small businesses participating in interstate commerce.
Accordingly, we continue to support a strong small business exemption based on the approach set out in a “Draft Interim Report,” dated Dec. 8, 2008, prepared by the Small Seller and Vendor Task Force of the Streamlined Sales Tax Governing Board. Under that report, a business would be exempted from sales tax collections for foreign states if it had national sales of less than $5 million; also a business with $5 million or more in revenue would be exempted if that business had less than $100,000 in remote sales. We believe the exemption should focus on the size of the business, and not the volume of interstate sales.
We urge Goodlatte to protect SMB IT businesses by including a small business exemption into any Internet sales tax legislation consistent with what was recommended in the 2008 report to the Streamlined Sales Tax Governing Board.
Lamar Whitman is CompTIA’s director for public advocacy.
