Marketplace Fairness Act Update: House Holds Hearing on Internet Tax Issues

Thursday, April 24, 2014

On March 12, 2014, the House Judiciary Committee held a hearing on Exploring Alternative Solutions to the Internet Sales Tax Issue, during which committee members discussed core issues that they would like to address in developing House legislation that would enable state and local governments to collect taxes on online retail sales. The hearing was significant in that it was the first action that the House Judiciary Committee has taken on this issue since the Senate overwhelmingly passed the Marketplace Fairness Act (S 743) in May 2013. A webcast of the hearing and the written testimony from hearing witnesses is available here.

Discussed at the Hearing

Committee members discussed their priorities and concerns with the tax simplification, collection, and remittance proposals offered by the witness panel, none of whom represented state or local governments. Chief among these concerns were protecting retailers from aggressive out-of-state audits, addressing retailer concerns over sales tax collection and remittance compliance costs, and the need for the committee to organize legislation to ensure that retailers and consumers pay taxes owed to state and local governments on online sales.

At the hearing, Congressman Jason Chaffetz (R-Utah), who last month revealed his plans to lead House efforts to craft a bill on Internet sales tax issues, indicated his strong preference to embrace a destination-based sales tax system instead of an origin-based sourcing system in the new bill. Chaffetz noted that an origin-based system, in which sales tax collection responsibilities are based on the location of the businesses from which the item was purchased, as opposed to the address of the customer who purchased the item, would inspire businesses to locate in non-sales tax states to reduce or eliminate collection responsibilities and costs. Chaffetz also indicated his preference for using the Senate-passed legislation (S-743) as a framework in building a House bill but said he would probably would not include language that would provide an exemption from tax collection for retailers with $1 million or less in U.S. remote sales.

A majority of committee members from both sides of the aisle expressed awareness of the need for Congress to act on Internet sales tax legislation, and many expressed a desire to work with Chaffetz on moving a bill through the committee this year. Much work remains to be done, however, and any new legislation will still face opposition by a faction of House majority members who view such measures as imposing new taxes on consumers. Committee members and witnesses discussed this issue, with some members noting that the Senate-passed legislation would not impose new taxes; rather, it would require the collection and remittance of taxes already owed to state and local governments by consumers who have avoided reporting and paying sales taxes on online purchases. The National Conference of State Legislatures revealed last year that state and local governments were being short-changed approximately $23 billion in unpaid sales and use taxes in 2012. This figure is only expected to increase as a greater number of retail purchases occur online in the coming years.

Legislative Outlook

Chaffetz’s office expects to have a draft bill organized in the next few months, but House Judiciary Committee consideration of the measure will likely would be delayed until summer, after a number of primary elections have been completed. Committee Chairman Bob Goodlatte (R-Virginia) did not provide any specific timeline for additional action following last week’s hearing.

Meanwhile, the GFOA continues to work with its partners at the National League of Cities, National Association of Counties, and U.S. Conference of Mayors to educate members of committee on the need to move forward with legislation as soon as possible, and to make sure that the bill is not packaged with any of the preemption measures currently pending before the committee. These measures include the Digital Goods and Services Tax Fairness Act (HR 3724), the Permanent Internet Tax Freedom Act (HR 3086), the Wireless Tax Fairness Act (HR 2309), and the Business Activity Tax Simplification Act (HR 2992). All of these measures contain provisions that would reduce either current or future revenues for state and local governments, and would preempt state and local government revenue raising authority.