federal sales tax legislation proposalsa voluntary organization of state revenue authorities. the...

© 2015 Avalara CONFIDENTIAL & PROPRIETARY

Federal Sales Tax Legislation Proposals

Shane Ratigan, JD, LLM, Avalara

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Shane is a tax law and compliance expert at Avalara and has been a business advisor on tax planning and succession for 10 years. He is responsible for managing compliance processes and tracking trends in the sales tax compliance environment. Shane holds a JD and LLM.

LLM in Taxation from University of Washington School of Law

JD from the Syracuse University College of Law

Shane Ratigan, Avalara

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Federal Sales Tax Legislation Proposals

• Potential National Legislation on Remote Sales – Congressional Proposals

• Marketplace Fairness Act

• Remote Transactions Parity Act

• Online Sales Simplification Draft Act

• Potential US Supreme Court Action on Remote Sales

• States Pushing the Envelope


Sales Tax Collection Obligation

Where are you obligated to collect already?

Nexus: the legal connection that triggers an obligation to collect.

In states where your company has conceded nexus, the proposed legislation and potential court decisions that may come will not affect your obligation to collect in those states.



Nexus analysis for sales tax collection purposes is mainly controlled by a handful of US Supreme Court cases, the most recent of which was Quill.

The Justices in Quill attempted to set out a “bright line” rule for vendors and states to follow: the ‘physical presence’ test.

Almost immediately, the states began to tug and stretch the definition of ‘physical presence’ such that in some instances a ‘physical presence’ can be established with only the slightest of actual physical contact.



What are “Remote Sales”?

A “Remote Sale” is a retail sale made into a state where the seller lacks nexus. If nexus was established the sale would be subject to sales tax rules.

For purposes of the proposed federal legislation, the characterization of sales as either “remote” or not will impact many sellers.



Streamlined Sales Tax Governing Board.

A voluntary organization of state revenue authorities. The organization’s purpose is to accelerate simplification in the sales tax realm.

Streamlined has had some successes and now half of the sales tax states are members. If either of the likely Congressional solutions becomes law, this organization and its charter will be elevated in profile.



A solution found in a potential Supreme Court decision likely will not place as much emphasis on Streamlined.

A change in nexus standards would empower the individual states to compel collection outside the framework of Streamlined.

A state by state deconstruction of existing nexus rules will similarly emphasize individual states’ ability to obligate out of state vendors to collect and remit sales taxes.


Potential Congressional Action

• The chances of a Congressional Rule on Remote Sales remains high.

• A version of the MFA passed the Senate in 2013.

• 3 versions submitted or in draft form in the 2015/2016 US Congress:

• Marketplace Fairness Act of 2015

• Remote Transactions Parity Act of 2015

• Online Sales Simplification Act (draft only)


Marketplace Fairness Act of 2015

• Allows states to obligate out-of-state businesses to collect sales tax.

• Gives Streamlined Sales tax states a green light at the outset. 180 days after notification, an SST state may begin to obligate collection by sellers in remote states.

• Small Seller Exception: less than $1million in “remote sales”



• Non-SST states can begin to obligate collection by remote sellers 6 months following adoption of SST like minimum simplification requirements.

• States must provide:

– a single entity within the State responsible for all State and local sales and use tax administration, return processing, and audits for remote sales sourced to the state

– a single audit of a remote seller for all State and local taxing jurisdictions within that State

– a single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

– Rates, boundaries and taxability rules available on-line



• https://www.congress.gov/114/bills/s698/BILLS-114s698is.pdf

https://www.congress.gov/114/bills/s698/BILLS-114s698is.pdf


Remote Transactions Parity Act of 2015

• Allow states to require out-of-state businesses to collect sales tax like MFA.

• Applies to anyone making “remote sales” over $10 million annually, this small seller exemption is gradually phased out over time to $1 million.

• Provides an exemption for catalog only sellers with no internet presence.



Requires states to employ similar improvements as members states in the Streamlined presumably have already instituted, in order to take advantage of the law.

– (1) the designation of a single state entity responsible for all state and local sales and tax administration, return processing, and audits of remote sales;

– (2) a single audit of a remote seller for all taxing jurisdictions in the state;

– (3) direct contact with a certified software provider utilized by the remote seller in conducting an audit;

– (4) a single sales and use tax return for use by remote sellers that is filed with a single entity responsible for tax administration;

– (5) a uniform sales and use tax base; and

– (6) sourcing of all remote sales in compliance with criteria established by the law (similar to SST sourcing).



• Requires a single registration for all states before any state can compel collection.

• Limits the ability of remote states to audit small sellers (less than $5mm gross annual sales), except in cases of fraud or misrepresentation.

• There looks to be bipartisan support for the RTPA in the House.



• https://www.congress.gov/bill/114th-congress/senate-bill/698

https://www.congress.gov/bill/114th-congress/senate-bill/698


Online Sales Simplification Act

• A very different approach

• Imposes an Origin Based Sales Tax on all inter- and intra- state sales

• Imposes a formulaic ‘flat rate’ for sellers within non-sales tax states

• Requires states to re-distribute taxes collected on remote sales to the destination states

• http://thehill.com/policy/finance/229429-house-chairman-circulates-online-sales-tax-draft

http://thehill.com/policy/finance/229429-house-chairman-circulates-online-sales-tax-draft


The U.S. Congress May Miss Its Chance to Write New Sales Tax Rules

• A recent case brought by the Direct Marketing Association against the state of Colorado contained a concurring opinion by Justice Kennedy.

• Justice Kennedy complains that Quill is an impediment to the collection of sales taxes by the states. He cites statistics on the explosive growth of on-line mail order sales and the states inability to capture taxes due on those sales.



Justice Kennedy also said this:

• “There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”

• Plain English translation: internet sellers already conduct sufficient activity in remote states to allow the states to compel collection of sales taxes: Quill is out of date.



• Finally, Justice Kennedy invites the ‘legal system’ to find an appropriate case to challenge Quill so the Court can review that decision in light of changing markets driven by the internet.

• Justice Kennedy is asking for a chance to undo Quill in a manner that would open the door to collections by remote vendors.



• Who needs a Marketplace Fairness Act when the Supreme Court has the power to change the game in one opinion?

• http://www.supremecourt.gov/opinions/14pdf/13-1032_8759.pdf

http://www.supremecourt.gov/opinions/14pdf/13-1032_8759.pdf


What Would Any of These Federal Solutions NOT do?

• No requirement of uniform taxability rules

• States are still free to establish distinct rules on what is or what is not subject to sales tax:

– Product specific rules

– Services specific rules

– Entity specific rules


What Would Any of These Federal Solutions NOT do?

• No requirement of uniform rates

• No requirement of uniform exemption rules

• No requirement of uniform methods of handling certain transaction types.


States Are Pushing the Limits of Nexus

• Alabama has created a new portal for out-of-state voluntary collectors.

– Effective October 1, 2015, SSUT will allow participating sellers to collect, report, and remit an 8% flat seller’s use tax on sales of tangible personal property delivered to Alabama purchasers. The 8% is remitted to the state, but covers both state and local taxes.

– This looks like AL’s response to the ‘simplification’ requirements in MFA and RTPA.

– http://revenue.alabama.gov/news/09042015.pdf

http://revenue.alabama.gov/news/09042015.pdf



• Alabama revenue regulators also established ‘economic nexus’ type rules that apply to sales tax vendors as of Jan 1, 2016.

• Alabama’s new sales and use tax nexus standard directly challenges the US Supreme Court’s sales tax ‘physical presence’ requirement outlined in Quill.

• This regulation may offer taxpayers a vehicle to challenge Quill, as invited by Justice Anthony M. Kennedy



• The South Dakota legislature took a more direct approach.

• Senate Bill 106 provides that any seller shall remit sales tax, provided the seller meets the following criteria in the previous or current calendar year for those sales into South Dakota:

– Seller’s gross revenue from the sale of tangible personal property, products transferred electronically, or services for delivery into South Dakota exceeds $100,000, or

– Seller sold tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions.



• It seems like the folks in South Dakota had an idea this new law might trigger some resistance; the law includes language that will ‘fast-track’ the question of the constitutionality of the Act to the state’s Supreme Court.

• The bill provides that whether or not the state initiates an audit or other collection procedure, it may bring a declaratory judgment action against a seller without physical presence in South Dakota who meets the economic nexus threshold. This will enjoin the state from further actions.

• The South Dakota legislature is setting up a ‘sooner rather than later’ court show-down to determine whether the new rule to obligate collections of sales tax is valid under state and federal law.



• Watch out for more states to push the limits of Nexus in the absence of a federal solution.

• The National Conference of State Legislators recently published model legislative language. The suggested provisions here are extremely aggressive in light of current nexus rules.

• http://www.ncsl.org/Documents/fiscal/2016_Sales-Use_Tax%20Nexus_.pdf



• Click-Through Nexus Adopted in WA, MI, NV, VT

• Virtually Identical to original NY version:

• A referral arrangement combined with a web based advertisement triggers nexus



• The adoption of “click-through” nexus by states has triggered a at least one large internet retailer to impose residency restrictions on participants in its referral-based advertising program as of Sept. 1, 2015:

“In addition, if at any time following your enrollment in the Program you become a resident of Arkansas, Colorado, Maine, Missouri, Rhode Island, or Vermont, you will become ineligible to participate in the Program, and this

Operating Agreement will automatically terminate, on the date you establish residency in that state.”

– https://affiliate-program.amazon.com/gp/associates/agreement/

https://affiliate-program.amazon.com/gp/associates/agreement/


The Future

• Congress’ strong interest in the topic of remote sales tax collections.

• US Supreme Court’s strong interest in the topic of remote sales tax collections.

• US States’ strong interest in the topic of remote sales tax collections.

• Business’ overarching desire for clarity and predictability.

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