MFA Update: Rep. Goodlatte’s Seven Principles and an Interview with George Isaacson

Although the Marketplace Fairness Act (S. 743) ("MFA") has not yet progressed out of a House committee since its Senate passage last spring, it continues to make headlines. In late September, the House Judiciary Committee, chaired by Rep. Bob Goodlatte (R-Va.), released seven “Principles on Internet Sales Tax.” Brann & Isaacson senior partner George Isaacson was recently profiled by State Tax Notes discussing both the MFA and Goodlatte’s Seven Principles.

The Seven Principles outlined by Representative Goodlatte provide for:

1. Tax Relief – “no new or discriminatory taxes not faced in the offline world”
2. Tech Neutrality – brick and mortar and online businesses “should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less…than that on similarly situated offline businesses”
3. No Regulation Without Representation – taxpayers “should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement”
4. Simplicity – no “onerous compliance requirements,” “laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary”
5. Tax Competition – “Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-à-vis their foreign competitors”
6. States’ Rights – “States should be sovereign” and “the federal government should not mandate that States impose any sales tax compliance burdens” and
7. Privacy Rights – “Sensitive customer data must be protected.”

The Marketplace Fairness Act: Are Online Retailers Now Required to Collect and Remit Every States’ Sales Tax Even Though They Do Not Have A Physical Presence?

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act (S.743). If enacted into law, the Act would require Internet sellers (as well as catalogers and other direct marketers) to collect and remit the sales and use tax of each state (and any local jurisdictions that assess sales taxes) on all of their remote sales to the state, even if the retailer does not have a physical presence in the state. If adopted, the bill would do away with the nexus/physical presence requirement for mandatory sales tax collection described in Quill v. North Dakota.

Much of the media coverage of the Marketplace Fairness Act gives the impression that the requirement of sales and use tax collection without a physical presence will be effective immediately, now that the Senate has passed the bill. That, of course, is not the case. In order for states to have the power to require sales tax collection by companies without a physical presence, the U.S. House must pass the bill in the same form as did the Senate, and then President Obama must approve the jointly passed legislation.

While President Obama has indicated his support for the Marketplace Fairness Act, there are a number of members of the House who are opposed to the bill. Moreover, unlike the Senate which did not hold any committee hearings prior to voting, the House will hold hearings on the legislation, through the House Judiciary Committee. Importantly, House Judiciary Committee Chairman Bob Goodlatte, a Republican from Virginia, has noted his concern regarding the failure of the Marketplace Fairness Act to address many of the concerns of remote sellers. Speaker Boehner has voiced similar concerns. Thus, it is likely that even if legislation abrogating Quill is adopted by the House ― a possibility given existing bipartisan support ― such a bill will probably not be in the same form as passed the Senate. Moreover, given the significant role played by Rep. Goodlatte, Speaker Boehner, and other members of the House, chances are there will be a substantial delay before adoption of any legislation. Indeed, the House Judiciary Committee has yet to schedule hearings on the bill, and it has been reported that the Committee is drafting its own legislation. The message for any remote seller should be wait and see, at a minimum, before embarking on costly measures to implement sales tax collection in the more than 9000 jurisdictions that impose sales taxes.

Senate Passes Marketplace Fairness Act

By a vote of 69 to 27, the U.S. Senate on May 6 passed the Marketplace Fairness Act (“MFA”). The MFA would authorize states and other taxing jurisdictions that meet minimal tax simplification requirements to impose a sales/use tax collection obligation on Internet retailers and other remote sellers. The final version of the bill expanded the original scope of the authorization to include tribal organizations, in addition to states, US territories, and the District of Columbia. No additional simplification measures were added by the Senate, leaving a bill that does not require genuine reform of state and local sales and use tax systems. Nor did the Senate raise the threshold for the small seller exemption above $1 million in total US sales, leaving small businesses vulnerable to costly and burdensome compliance and tax administration requirements. As any business put through the rigors of even a single state’s audit process knows, the specter of more than 45 audits each year can be enough to cripple a smaller Internet or catalog vendor.

The MFA now moves to the House of Representatives, where the prospects for passage are less certain. Some Republican representatives have voiced support for the bill, however. Ecommerce sellers interested in the bill should contact their representatives to make their voices heard, before the bill becomes law. We will continue to update our readers on developments concerning the MFA.

Not So Simple–Recent Developments in Taxing the Cloud

We write frequently about developments surrounding federal tax legislation such as the Marketplace Fairness Act, which is up for a vote before the Senate on May 6. One of the major issues critics have with the Act is that despite proponents’ claims, it fails to provide for real simplification of state and local tax regimes, such as a uniform tax base among the states. Without a uniform tax base, compliance is incredibly complex for even the savviest of retailers.  The problem is much worse with respect to computing services and digital products delivered over the Internet.

For instance, cloud computing has some of the murkiest tax rules – some states have issued clear statements regarding taxability of IaaS, SaaS, or PaaS, but few have addressed all types of cloud services and many have failed to address the issue at all. Retailers are left guessing at the proper tax treatment of their sales and hoping their interpretation of tax rules is the correct one. That tax rules are ever-changing does not help matters. A uniform tax base would lessen this problem. Instead, retailers must monitor developments in myriad jurisdictions to find some clarity, although tax treatment still varies from state to state.

Idaho, for instance, recently exempted SaaS from sales and use tax by amending its statute to exclude “software accessed over the internet or through wireless media” from the definition of tangible personal property. See Idaho Code § 63-3616(b). Previously, the statute included as taxable tangible personal property any non-custom computer program “regardless of the method by which the title, possession or right to use the software is transferred.” The Idaho State Tax Commission interpreted this language as imposing tax on SaaS, although it noted in its opinion that “Due to the complexity of the business models, it is not possible to provide an all inclusive list of taxable sales transactions or taxable uses. As this technology advances, it may introduce more rather than less certainty.” Cloud Computing and Related Software Sales and Use Tax Issues (10/22/2012) (emphasis added). Even when providing some now-moot clarity to the taxability of SaaS, the state had to admit that its interpretations could not be considered definitive or final.

U.S. Senate Delays Vote on Marketplace Fairness Act until May 6

On Thursday, April 24, the U.S. Senate delayed its vote on S. 743, the “Marketplace Fairness Act,” which was originally expected as early as this week, until Monday, May 6, 2013. In the final procedural vote before the Senate takes up the bill on May 6, there was growing opposition to the fact that the bill had skipped the committee process, but there appeared to still be enough votes for passage. Earlier in the week, the vote to proceed without committee action was 74–20; on April 24 it was 63–30. More senators appeared to be concerned that careful consideration via a committee hearing is imperative before authorizing states to impose the complex existing state and local sales tax system on ecommerce and remote sellers. As we have commented before, the Marketplace Fairness Act fails to include such fundamental simplification measures as one tax rate per state, uniform tax bases and exemptions, vendor compensation requirements, and the harmonization of state sales tax holidays. Readers can learn more about true sales and use tax simplification here.

The House of Representatives has yet to take up the parallel bill (H.R. 684). We will continue to follow developments on federal legislation.

Senate Approves Non-Binding Budget Amendment Supporting Imposition of State Use Tax Collection Requirements on Remote Sellers, But Genuine Simplification Still Sorely Needed

On Friday, March 22, the United States Senate approved a non-binding amendment to the Senate budget resolution, by a vote of 75-24. The non-binding amendment expresses support for the adoption of a federal bill authorizing states to impose use tax collection obligations upon out-of-state retailers without regard to whether the retailers have a physical presence in the state. The Senate did not vote on an actual bill specifying the terms on Congressional authorization for expanded state use tax collection authority.

E-commerce vendors and other remote sellers interested in the legislation should contact their representatives in Congress to ensure that any federal bill considered for adoption guarantees meaningful uniformity and simplification of existing state sales and use tax systems. The bill currently before Congress, the so-called Marketplace Fairness Act, fails to include fundamental simplification measures, such as requiring one tax rate per state and uniform tax bases and exemptions, providing for vendor compensation, implementing consistent and coherent sourcing rules for products and services, and harmonizing state sales tax holidays. Readers can find out more about true sales and use tax simplification here.

We will continue to follow developments on federal legislation.

Committee Hearings Held on Remote Collection Bills; Coalition Forms to Demand True Simplification Of State Sales Tax Systems, Defend Quill

We have written previously about attempts by Congress to overturn the physical presence nexus standard of Quill Corp. v. North Dakota via the Main Street Fairness Act, the Marketplace Fairness Act, and the Marketplace Equity Act. The bills vary in their specifics as we discuss here and here, but most simply put, all three bills would permit states to require remote sellers to collect and remit sales and use tax despite such sellers having no physical presence in the state. While it is difficult to predict what Congress may do in an election year, it appears that so far, the Main Street Fairness Act has not made much progress through Congress since being introduced. The other two bills have seen some committee action lately, however, as discussed below.

Meanwhile, a coalition has formed to help protect remote sellers’ interests. The TrueSimplification of Taxation (“TruST”) Coalition was formed jointly by the Direct Marketing Association, the American Catalog Mailers Association, the Electronic Retailing Association, and NetChoice to represent “American businesses in the fight to keep interstate commerce and competition free from unfair tax burdens imposed by states where our businesses have no operations or representation.” Brann & Isaacson partners George Isaacson and Martin Eisenstein assisted in forming the coalition and provide ongoing advice regarding the sales and use tax collection implications to remote sellers.

Obama Administration Releases Consumer Privacy Bill of Rights

In April 2011, Senators Kerry and McCain introduced a bill entitled the “Commercial Privacy Bill of Rights." As discussed in this space, the bill would have required online collectors of information to permit individuals to opt out of the collection of information about browsing and shopping activities and required affirmative consent (opt-in) for the collection of sensitive personally identifiable information, including email addresses. The bill’s introduction was met with significant hand-wringing by the online business community about the impact that it might have on the business practices of even the most reputable electronic merchants. The bill was referred to committee, and little has been heard about it since.

But the issue has not gone away. Apple, Google, Facebook, Path, UPromise, and others have all suffered embarrassing public relations setbacks as a result of the exposure of certain of their practices relating to the collection and use of user information.

In the meantime, the Obama Administration has shifted its focus to a (mostly) non-legislative solution to the perceived need for more robust protection of consumers’ online privacy. On February 23, 2012, the Obama administration published A Consumer Privacy Bill of Rights The Consumer Privacy Bill of Rights provides for industry self-regulation coupled with the prospect of government enforcement in the event that industry fails to do the things that it claims it will do. It would apply to “personal data,” broadly defined as any data that can be linked back to an individual.

Bills Introduced in Congress to Override Quill in Favor of Streamlined Sales and Use Tax Agreement

On July 29, 2011, the so-called “Main Street Fairness Act” was introduced in both houses of Congress. The bills, introduced as H.R. 2701 in the House of Representatives and as S. 1452 in the Senate, are identical. Under the proposed law, Member States in the Streamlined Sales and Use Tax Agreement (SSUTA) would be authorized to require remote sellers (i.e., Internet retailers and other direct marketers with no physical presence in the state) to collect and remit state and local sales and use taxes notwithstanding the substantial nexus standard established by the Supreme Court in Quill Corp. v. North Dakota. There are currently 24 full and associate member states in the SSUTA, representing approximately 36% of the population of the United States. Many larger states, including California, Florida, Illinois, New York, Pennsylvania and Texas are not SSUTA members.

Similar bills have been introduced in past sessions of Congress, including in 2003, 2006, 2007 and 2010. Brann & Isaacson Senior Partner, George Isaacson, has testified with regard to such prior legislation in 2003, 2006, and 2007 that the SSUTA has not achieved the goal of genuine simplification and uniformity of states sales and use tax systems.  The requirements imposed on states by the current Congressional bills are substantially identical to prior versions and, in some respects, are even less demanding for states. In addition, H.R. 2701 and S. 1452 contain no express minimum level or “small seller” exemption that would protect smaller retailers from the obligation to collect use tax in all member states. Instead the bills defer to small seller exemptions established by the SSUTA states themselves.

We will keep you apprised of further developments regarding the bills.

Commercial Privacy Bill of Rights Introduced in Congress

The introduction of the so-called Commercial Privacy Bill of Rights by Senators Kerry and McCain on April 12, 2011 suggests that we may be about to enter an era of robust regulation of information gathering regarding the online browsing and shopping habits of consumers. This type of data has come to be an important tool for online marketers to improve the efficiency of online advertising buys, and to improve other marketing techniques. At a minimum, this development presents a risk that online merchants will need to build out substantial new technical infrastructure to accommodate a welter of new rules under this bill. Beyond that, it may make it difficult even for highly respected and responsible merchants to engage in marketing activities that are an important part of their tool kit in the information age.

Among other things, the bill contains the following requirements:

• Collectors of information must implement security measures to protect the information they collect and maintain.

• Collectors of information must provide clear notice to individuals of the collection practices and the purposes of such collection. Additionally, collectors must provide the ability for an individual to opt out of any information collection that is unauthorized by the Act and to provide affirmative consent (opt-in) for the collection of sensitive personally identifiable information. Respecting companies’ existing relationships with customers and the ability to develop a relationship with a potential customers, the bill would require "robust and clear" notice to an individual of his or her ability to opt-out of the collection of information for the purpose of transferring it to third parties for behavioral advertising. It would also require collectors to provide individuals either the ability to access and correct their information, or to request cessation of its use and distribution.

• Collectors must bind third parties by contract to ensure that any individual information transferred to the third party by the collector will only be used or maintained in accordance with the bill’s requirements. The bill requires the collector to attempt to establish and maintain reasonable procedures to ensure that information is accurate.

Proponents of Streamlined Sales Tax Legislation Remain Unwilling To Pursue Genuine Simplification, While Exaggerating The Amount Of Uncollected Use Tax on eCommerce Sales

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.