Earlier this month, Massachusetts Congressman Bill Delahunt introduced H.R. 5660, “a Bill to promote simplification and fairness in the administration and collection of sales and use tax, and for other purposes.” H.R. 5660 represents the latest effort by Congressional allies of the Streamlined Sales and Use Tax Agreement (“SSUTA”) to promote legislation that would overturn the substantial nexus standards that limit states’ power to impose sales and use tax collection obligations on out-of-state sellers, as reaffirmed by the Supreme Court in Quill v. North Dakota
Sadly, H.R. 5660 represents no real promotion of simplification of state sales and use tax systems over the level of improvement introduced in prior bills which fell far short of the mark. Indeed, H.R. 5660 is nearly identical to a bill introduced by Mr. Delahunt in 2007 that endorsed the SSUTA, the shortcomings of which Brann & Isaacson senior partner, George Isaacson, explained to Congress in December 2007. Among the fundamental steps toward true simplification that the states have still refused to adopt (and that H.R. 5660 fails to require) are a reduction in the number of state and local taxing jurisdictions, a single sales tax rate for all jurisdictions in a state, uniformity in the tax base, and uniformity in the measure of tax for like transactions, to name just a few.
Furthermore, while further simplification remains elusive, there is growing evidence that states have substantially overstated the amount of revenue they “lose” through uncollected sales and use tax on Internet and other direct marketing sales by out-of-state vendors who are not required to collect such tax under Quill. The SSUTA contingent has long relied upon a study conducted by a group at the University of Tennessee (the “UT Study”), which was most recently updated in April 2009. The UT Study estimates that states will fail to collect between $45-50 billion in sales and use tax on direct marketing sales during the five year period from 2008-2012.
A more recent study, prepared by Jeffrey Eisenach and Robert Litan at Empiris LLC, entitled “Uncollected Sales Taxes on Electronic Commerce: A Reality Check” (the “Empiris Study”) and published in February 2010, presents a compelling critique of the UT Study. The Empiris Study’s Executive Summary powerfully summarizes the study's conclusions, including the fact that total potential uncollected sales tax revenues in 2008 were less than three-tenths of one percent of all state and local tax revenues. Also, it found that more than one-third of such uncollected tax revenues are associated with small businesses that would likely be excluded from use tax collection obligations under a “small business” exemption in federal legislation. Overall, the Empiris Study convincingly shows that the amount of projected uncollected state and local sales and use tax is far less than claimed by states or projected by the UT Study. Indeed, the Empiris Study concludes that “the increased collections associated with overturning Quill would be substantially lower than previously thought,” and would be approximately 33% of the amount estimated by the UT Study.
Such relatively modest amounts of additional tax revenue do not justify imposing the still-significant regulatory and compliance burdens associated with state and local sales and use tax collection that, in part, motivated the Supreme Court’s decision in Quill. The proper solution to the ongoing complexity of state and local sales and use tax systems is true simplification, which H.R. 5660, unfortunately, does not provide.