My 8 Simple Steps to #eFairness

I encourage the United State Congressman who are drafting new legislation in 2015 to consider an alternative approach.  I would be happy to discuss my ideas on a broader basis but here is my solution boiled down to 8 steps (for retail sales).

My 8 Simple Steps to #eFairness

My 8 Simple Steps to #eFairness

Here is my solution to #eFairness:

  1. All remote retail sales would be taxable at the “one tax rate” per destination state. The “one tax rate” per state would apply to ALL “remote retail sales” (that cross state lines) from the “home state” and “nexus” states.  Basically, ALL retail products that are shipped in interstate commerce are treated equally by everyone. It “evens out” the playing field on all “remote retail sales.”  It would not apply to sales made to dealers that buy then resell. Only the resale to the end user/customer would be taxable.
  2. No third party software integration would be required.  No recoding of any websites.  It is simply adding “one tax rate” per state.
  3. Traditional mail order transactions would also have one tax rate per state. This would capture all offline interstate transactions and the tax would be easy to calculate.
  4. U.S. Customs would apply one tax rate per state for any inbound INTERNATIONAL retail purchases and forward the revenue on to the states.  NOTE: I amended #4 in the comments section below the article.
  5. States that have no sales taxes could use a host states system or a centralized filing system (such as a Certified Software Provider) to submit taxes.
  6. Auditing/civil/criminal jurisdiction over a “remote retail seller” is NOT expanded to all the states where a tax is submitted. The federal legislation would delegate that only the “home state” would have jurisdiction over “remote sales.”  Each business would be required to claim a “home state” for remote sales. NOTE: I amended #6 in the comments section below the article.
  7. All retail interstate transactions are taxable at “one tax rate” per state.  No exemptions for clothing or other items IF the items cross the state border.
  8. Tax Exempt Organizations would be allowed to claim a refund on their state income tax returns for sales taxes paid on remote retail sales.  This would simplify the paperwork so exemption certificates would NOT be required to be collected by remote retail sellers.

My plan encourages states to compete on sales tax exemption incentives within their own States.  How? This approach would make states review their retail sales tax rates on certain products.  For example, in Minnesota there is no retail sales tax on clothing.  All “remote sales” being delivered into Minnesota from out-of-state would be taxed at the base state retail rate.  Both Internet based and brick & mortar businesses located within Minnesota would have the intrastate (in-state) advantage of selling tax free clothing to its population. My plan would encourage states to provide incentives for companies to relocate or expand their physical presence in their state.  One incentive might be to exclude certain products from retail sales tax on intrastate (in-state) purchases like Minnesota does.  A retailer located in Minnesota still retains the right to sell tax free clothing.  For example, Overstock, which does not have “physical presence” in Minnesota would NOT have the right to sell tax free clothing in Minnesota until they establish physical presence in the state. This would encourage the growth of businesses to expand outside of merely one state and encourage tax competition between the states. States could also have agreements on “remote sales tax” collected to provide a portion out to the counties, cities, tribes etc…a revenue share since it is NEW money they was not collecting prior.  Everyone would be happy (maybe).

Comments

  1. says

    Good points in general.

    It would be nice to see more details on how US Customs will identify if a sale is for Retail or Resale in item 4, ie, will it be based on having to manage valid resale certificates. And will US Customs have to hold the items until after the buyer pays the sales tax. It would be helpful if you can provide an example of how US Customs will handle a retail and a resale imported item. If buyer does not pay the sales tax, will US custom send the item back or donate/liquidate?

    In item 6, since only the home state has rights to audit companies with nexus in the home state for remote sales, it would be nice to see more details on how each home state will have any incentive to ensure taxes are accurately collected/remitted to other states. And whether the states with no sales tax will have to establish a sales tax audit team just to audit for tax to be paid to other states.

    Keep up the good work on your blog.

    • says

      Doug thank you for the good questions.

      Regarding Item #4 U.S. Customs and resale certificates. I would see no need for resale certificates. My company imports linen and textile items for resale. On the customs documents I am required to disclose attributes such as fiber content, country of origin, etc…I would suggest adding an additional declaration line to the documents that asks if the items are for resale. A simple yes or no would suffice. Federal laws are already on the books that could be used to enforce false statements: 18 U.S. Code § 542 – Entry of goods by means of false statements. “Whoever enters or introduces, or attempts to enter or introduce, into the commerce of the United States any imported merchandise by means of any fraudulent or false invoice, declaration, affidavit, letter, paper, or by means of any false statement

      All other products imported in any other way (mail order, internet, etc…) would be subject to state destination sales tax unless a customs declaration is made declaring the items are for resale.

      After thinking about your comments maybe a reporting requirement would be a better method on foreign based retail transactions. Similiar to Attorney James Sutton’s idea. U.S. Customs already collects the data on items imported into the USA. All items that lack the resale declaration would be entered into a database that is shared with the state revenue departments. The revenue departments would then automate a billing process where they notify the person of the tax owed. Most (honest) people that receive a bill from their State revenue departments would comply. Each state could set a threshold in their system that generates a bill once a certain tax owed has been reached. A person could always check a box on the bill notifying the state that the item was for resale and exempt and provide the exemption certificate in response.

      Regarding item #6. The home state would be tracking total sales taxes collected and disbursed out to all of the states. The home state would get compensated on a revenue share basis for the collection and remittance to the other states. Similar to how the Certified Software Providers (CSP) would have been compensated under the Marketplace Fairness Act. If a business is stealing from another state the compensation benefit loss would be theft from the home state. The home state would incur a revenue loss and it would be their incentive to ensure the taxes are accurately collected/remitted to other states.

      States with no sales tax. Businesses located in these states would have to file their sales tax returns with a CSP or host state. I would envision a “Remote Transaction Audit Team” (made up through the SSUTA funded by states with sales taxes) that handles audits on businesses that have no state sales taxes. These states could fall under Federal jurisdiction similiar to Indian reservations. False information submitted by a remote seller from a tax free state could be prosecuted under mail or wire fraud through the U.S. Attorneys Office. It would provide an incentive to report honestly.

      • says

        Thomas,

        Thanks for your helpful details.

        Your proposed better method on foreign based retail transactions should be more convenient for US Customs because they would not need to oversee sales tax compliance or collections.

        We handle sales tax outsourcing and register/file sales tax returns in all states without any need to use filing software or integration. All needed is a monthly Excel sales report and we work with the different return forms in each jurisdiction. But some states forms require tax allocation to specific cities. How would you propose for a home state to revise its return form to allocate the tax to the proper city of other states? Would the solution also apply to AZ, CO, AL, LA where their counties and cities require filing of separate returns?

        Item 1 proposes to tax all retail items. Some categories may currently be mostly exempt in many states perhaps for “moral” reasons, such as certain medical items, prescriptions drugs, basic food, etc. Will these be taxable under your solution?

        • says

          Doug, Thank you again for the comments.

          I do not know the ins and outs of AZ, CO, AL, LA and their sales tax county/city rules. I think all participating states would have to be willing to change their collection methods. It would have to be something that is agreed upon through the SSUTA. As I stated in the article, States could also have agreements on “remote sales tax” collected to provide a portion out to the counties, cities, tribes etc…a revenue share since it is NEW money that (in most cases) was not collected prior. The problem with simplification is everyone wants a piece of the pie.

          Due to the complexity of “remote tax collection” I am just suggesting “major” simplification. Regarding “Some categories may currently be mostly exempt in many states perhaps for “moral” reasons, such as certain medical items, prescriptions drugs, basic food, etc. Will these be taxable under your solution?” These items would ONLY be taxable if they cross state lines in interstate commerce. If a person sources the non taxed item from within the boundaries of their state of residence then the items would remain tax exempt. Again this will allow local retailers to have the in-state advantage on selling tax free items.

          If any of my ideas resonate as a possible solution please share them with others in the industry. This is a complex issue. I spent the last year fighting the Marketplace Fairness Act but eventually I think something will be passed. I am just hoping it is simplified.

  2. says

    Doug,

    I am going to contact this company http://zed-systems.com/ . I use their program to extract data from QuickBooks. It is amazing. I am going to see if they could modify a query so that it can extract data for sales tax purposes to submit to the “home state” down to zip code of remote sale states. It might be as simple as extracting data…

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