Draft remote seller legislation provides unique federal solution
TAX BLOG |
In recent years, there has been quite a lot of discussion among retailers and state and federal governments over state revenue losses stemming from e-commerce and remote sales. Some states have taken legislative and regulatory approaches to enhance use tax collection, encourage voluntary sales tax collection and remittance by remote sellers, and directly challenge the physical presence standard adopted in Quill v. North Dakota. Meanwhile, Congress has wrestled with a number of bills proposing a federal solution, including the Marketplace Fairness Act (MFA), which the Senate passed in 2013, and the Remote Transactions Parity Act, which provides a similar solution to the MFA. However, all roads to a federal solution lead through the House Judiciary Committee, chaired by Bob Goodlatte of Virginia.
In response to the MFA, which was referred to the House Judiciary Committee after it passed the Senate, Chairman Goodlatte released seven basic principles that a remote sales tax bill should include: tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights. Deeming that the MFA failed to comply with one or more of these principles, the House Judiciary Committee stalled the bill without further action. Then, after nearly two years of debate and consideration, Chairman Goodlatte released his own draft bill aimed to address remote sales tax collection in 2015, followed by a revised discussion draft in August of 2016, titled the Online Sales Simplification Act (OSSA).
The OSSA proposes a hybrid-origin sourcing solution where states participating in a “clearinghouse” would allow destination states to impose a sales tax on remote sellers using the tax base of the seller’s location and a tax rate based on a single “destination rate” in the destination state. The remote seller’s origin would be used to determine the tax base and rate for states not participating in the clearinghouse. In-state retailers would be subject to the tax base and rate of that state, as is currently the case. The draft bill also defines “physical presence” to exclude presence in a state for under 15 days and the presence of click-through affiliates—a popular nexus expansion tool enacted by over 20 states.
While the OSSA is unlikely to be acted upon this year, the hybrid-origin sourcing proposal is a unique compromise—allowing remote sellers to use the tax base they are most familiar with to determine taxability, and a single destination rate to calculate the tax to be collected. The draft bill will be subject to much discussion in the coming months and the next legislative session. Remote sellers should be aware of the hybrid-sourcing approach and the likelihood that the proposal could become a competitive entry in the remote seller sales tax debate.