A New Internet Sales Tax Alternative – the Online Sales Simplification Act
After years of discussions, back-and-forth, pros and cons, supporters and naysayers, it looks like the Marketplace Fairness Act might be dead. But the government hasn’t given up on the idea of taxing internet sales across state lines. In fact, so many businesses are in favor of Marketplace Fairness that in some shape or form, online sales tax is still very likely to happen. And the latest iteration of that is a discussion draft called the Online Sales Simplification Act.
If you’re familiar with the Marketplace Fairness Act, then the name behind this bill will be familiar. It’s spearheaded by House Judiciary Chair Bob Goodlatte (R-VA), who is well known when it comes to these issues. Last year, Chairman Goodlatte published a list of seven components of online sales tax that he considers critical to its success. One of those was guiding principles is simplicity, and that’s where the Online Sales Simplification Act stands out from its predecessor bills.
The main idea of the Online Sales Simplification Act is that it relies on origin sourcing. This means that orders would be taxed at the rate of the location from where they are being shipped. So if you run a home-based business and live in an area with 6.5% sales tax, then you would charge your remote customers 6.5% tax on their orders. You would pay the collected taxes to your state, who would turn the money over to the customer’s states.
In contrast, most states currently use destination sourcing, which is where the tax rate is determined by the address to which the order is being shipped.
Clearly, origin sourcing is much simpler, because a retailer uses one tax rate for all orders.
On the surface, this sounds like a great idea. It certainly reduces the burden of having to determine the tax rate for each order placed on a retailer’s website. In some ways, it is. But on further review, there are drawbacks too. Here are some important things to note about the way this would work.
1. This Only Applies to Remote Sales
The method of taxation only applies to remote sales, which are defined as sales into a state where a retailer does not have a physical presence. Sales made into the seller’s home state (or any other states where it has nexus) are taxed as they have been traditionally. This means there are possibly two different methods for determining the tax rate for orders on the retailer’s website, depending on whether the sale is a remote sale or not.
2. The Definition of Nexus
The bill would define nexus for participating states so that it is the same for each state. This reduces ambiguity and complexity. It also specifically addresses affiliate relationships in a way that having an affiliate in a particular state does not, in and of itself, create nexus.
3. States Can Choose Whether to Participate
Similar to the Streamlined Sales Tax Project, only states that choose to participate would become party to the agreement. It prohibits any state that chooses not to participate, from levying sales tax on remote sales in any other fashion. It also prevents states from charging use tax (tax paid by and collected directly from the purchaser) on orders that have been charged sales tax, except in certain situations and only if a tax credit has been provided.
4. Fairness for States with No Sales Tax
A major concern is retailers moving their businesses to states that have no sales tax – the so-called NOMAD states. In the hopes of preventing this, the bill calls for sellers in these states to charge a flat rate on remote sales or report sales information by state, including buyer details, so that those states may collect the requisite use tax (in lieu of sales tax). This could also be a major surprise to customers in those states who are used to not having to pay sales tax.
5. Customers May Be Charged Different Rates based on Seller’s Physical Presence
A customer could buy the same item from a seller located in-state, or from a seller located out-of-state, and be charged different rates. For example, if the buyer’s local tax rate is 8% in a destination-based state, and the out-of-state seller’s rate is 6%, then the in-state seller would charge 8% sales tax and the out-of-state seller would charge 6%.
It’s still early, so it’s hard to know what might happen with this bill. Reactions have been mixed, but the one constant seems to be that the simplification of online sales tax still has a long way to go. The Online Sales Simplification Act is also not the only internet sales tax bill in the works. According to Politico, Rep. Jason Chaffetz (R-UT) is working on a bill based on destination sourcing that he says is "much, much better" than Marketplace Fairness was.