Marketplace Fairness Act: Taxing Questions Remain Unanswered
Dear Senator Enzi & Senator Alexander,
Thank you for your reply to our letter dated May 3, 2013 regarding the Marketplace Fairness Act. We appreciate you taking the time to answer; however, we do not think the most glaring issues have been addressed:
We have strong concerns about the preemption in section 6, which is the cause of a number of our questions (Questions 1, 3, 5, and 8).
Section 6 states: “this Act shall not be construed to preempt or limit any power exercised or to be exercised by a State or local jurisdiction under the law of such State or local jurisdiction or under any other Federal law.”
Under Section 6 preemption, states can choose not to subscribe to the SSUTA or the MFA minimum simplification requirements, create their own nexus laws, and collect taxes on out-of-state sales that way. These laws, which dubiously create nexus standards, would be outside of the minimum simplification requirements and also not require that a state subscribe to the $1 million small-seller threshold. Meaning that states could tax all remote sales regardless of the businesses revenue or gross receipts.
By stating that the federal MFA does not preempt or limit any power exercised or to be exercised by a state, states are now free to pursue out-of-state tax collection through their own means. For example, the New York affiliate marketers law; the Michigan, Arizona, or California privilege tax; California economic nexus; or the Oklahoma and Kentucky reporting requirements.
In its Quill decision, the Supreme Court acknowledged that Congress had the power to act on the issue of remote-seller tax collection. The MFA, as written, would allow states the ability to pass constitutionally questionable laws that attempt to expand nexus. The Supreme Court has never addressed the affiliate aspect of the New York law. The Supreme Court may have addressed the effect of “affiliates,” companies with partially shared ownership, on creating a physical presence nexus, but it has never addressed the effect of “affiliates” as term for online advertisers as used in the New York state law to create a physical presence nexus.
The MFA explicitly ignores this issue by allowing state laws to preempt the MFA. The fact that there are conflicting state court opinions on the effect of affiliate marketers creating a physical presence nexus – New York courts say they do, while Illinois courts say they don’t – is a reason that Congress should have the MFA preempt state law on the subject. Otherwise, remote retailers will continue to operate under a patchwork of conflicting state, and would be federal, law.
While these laws may be constitutionally questionable, a small-seller who does not have any physical presence in the state will most likely not have the resources to bring their claims to court.
The Section 6 preemption language was not included in the bill until this Congress. It is dangerous language that allows states to define nexus as they see fit and impose their taxation laws across their own physical borders. Removing this language would be helpful.
We are still concerned with the procedure for audits, dispute resolution, and collection authority.
Sales tax is passed on to the customer by the business; however, the business is the entity responsible for remitting the tax and therefore the entity beholden to tax collectors and taxation. A business owner being taxed by and out-of-state revenue department is subject to taxation without representation. Under the single audit authority, businesses would still be left open to audit possibilities from around 45 different tax jurisdictions, and it is not clear that tribal lands would be part of the single state auditing entity.
In your answer to the question about international taxation, you say that states can impose audits and liens on foreign businesses, by extension this authority would apply to businesses in other states as well.
We are also fearful that the limits on state audit ability and personal liability are not strong enough. There must be some way to prevent businesses from having to deal directly with out-of-state tax collection audits. Even if audits happen rarely, the possibility still exists. Language expressly protecting business from this sort of court proceeding would be very helpful in addressing our concerns
While there is a 90-day waiting period for states to begin collecting remotes sales tax, we believe that the Section 6 preemption, means that states can retroactively enforce their tax collection laws on their own citizens, regardless of the MFA’s prospective nature and waiting periods. Again, removing the Section 6 language would also be helpful to put in the bill, in addition to a removal of use tax collection should a state decide to participate in the MFA structure.
Our concerns about participation and simplification standards.
If a state chooses not to participate, that means they choose not to participate in collecting tax from other states, but there is not way for a state to choose not to comply with out-of-state sales taxes. Allowing states, especially those that have chosen not to enact a sales tax, to choose not to participate by simultaneously denying collection and remittance would offer states the greatest amount of choice and recognition of federalism under this crafting of remote sales tax collection.
To truly address federalism we must look at remote sales tax collection from both angles: not just the majority of states collecting sales tax, but also from the position of a minority of states who have elected against a sales tax.
Even if the Section 6 preemption is removed, we still find the simplification standards problematic. While software is often cited as the way to solve many simplification problems, the MFA allows states to continue with dubious rounding rules that will certainly apply to digital goods, allows taxation on daily deals at the full voucher value not the paid value, and does not require that remote sellers get the same tax holidays or deals that in-state sellers receive. These special deals are provided to all physically present sellers including big box stores
Including tribal lands adds around 550 new tax jurisdictions that can audit out-of-state retailers. These tribal lands were not included as taxation jurisdictions in S.336 of 2013, or S.1832 of 2011.
Even though the software is offered free of charge, sellers could end up with more than 45 different software products to integrate into their systems. When adding new software to a system, licenses are a fraction of the cost. Businesses must also pay for integration, mapping within the business’ existing system and any additional hardware that may be necessary.
Our concerns about taxation of financial services and digital products.
When looking at financial services products, we have to say that no state imposes taxes on financial services yet. Many at the federal level have looked to taxing financial services and in the European Union they already have financial transaction taxes. There is nothing in the MFA that prevents states from extending its authority to tax stock trades made online. There is no distinction between products and services, and there is no exemption for sales tax on specific products.
Additionally without clarification and inclusion of the Digital Goods and Services Tax Fairness Act of 2011 (S.971) in the bill language that the MFA does not apply to digital goods, the MFA could be construed as proscribing the manner in which digital goods are taxed.
In summary, the preemption language is most problematic. It allows states to neglect the simplification requirements and pursue cross-border taxation in a way that is not simple, easy, or fair. Even though Congress has the authority to legislate in matter of remote taxation, the preemption language will likely make remote sales tax collection overly burdensome to interstate commerce and therefore unconstitutional. In addition to removing the preemption language, Congress should include Representative Goodlatte’s Business Activity Tax Simplification legislation and Representative Lofgren’s Digital Goods and Services Tax Fairness legislation to prevent state taxation overreaches in the digital sector and on business income.
Thank you again for your previous reply and concerns. Our questions and this reply are intended to flesh-out issues and present reasonable solutions to what are major issues for taxpayers. We look forward to working with you to address these issues and ensure no legislation is passed that harms taxpayers nationwide. Please have your staff contact Katie McAuliffe by email, firstname.lastname@example.org, or phone, 202-785-0266, if you would like to continue the discussion.