Overview
WASHINGTON, D.C. (March 12, 2014) — Stephen P. Kranz, a partner in McDermott Will & Emery’s State and Local Tax Practice Group, appeared today before the House Judiciary Committee as an expert witness on alternative approaches to the Internet Sales Tax issue.
Specifically, Mr. Kranz shared his views on ways Congress can best address the problems of collecting sales tax on remote sales. As part of this, he testified in support of principles issued by Chairman Goodlatte that provide guidance related to the imposition of tax on remote sales.
One growing problem, Mr. Kranz said, is the increased tendency by the states to ignore or find ways around the U.S. Supreme Court’s 1992 decision in Quill v. North Dakota. In that landmark decision, the Court reaffirmed the rule that a state may not require remote sellers to collect sales tax unless the remote sellers have a physical presence in the state.
“As commerce continues to shift to the Internet, states have looked for ways to force remote sellers to collect tax, despite the Court’s holding,” Mr. Kranz told the Committee. “The states have in some cases adopted wildly divergent, contradictory and burdensome laws that have harmed businesses and imposed an undue burden on interstate commerce.”
“Congress has two choices regarding how it will react to the problems of collecting sales tax on remote sales,” Kranz told the Committee. “Congress can either (1) exercise its authority under the Commerce Clause to provide a framework under which states can enforce collection by remote sellers, or (2) Congress can do nothing. There is no question that states will continue to try forcing remote sellers to collect their sales taxes regardless of Congress’ action or inaction. The question is whether Congress will provide the necessary framework to ensure that state collection efforts will be uniform, clear, predictable and fair or, in the alternative, Congress will remain silent and allow state collection efforts to be confusing, unpredictable, burdensome, and potentially discriminatory.”
Kranz pointed to a number of outcomes that have already resulted from lack of action by Congress, including inconsistent and unpredictable state-by-state action to address collection problems. “In the last decade, states have enacted at least three types of legislation as self-help to address the lack of a federal solution. The three types of legislation include: (1) click-through nexus legislation; (2) use tax reporting legislation; and (3) unilateral “Quill is dead” legislation.”
“If no federal framework is adopted it should come as no surprise when the [states participating in the Streamlined Sales and Use Tax Agreement] collectively act as if Quill is no longer a restriction,” Kranz told the Committee. “Remote sellers facing assessment by twenty-four states with similar statutes will be forced to either commence litigation or surrender their constitutional rights and begin collecting tax on remote sales. Only Congressional action can prevent the parade of horribles that would follow. If Congress does not act there will be little protection for businesses and much of the American economy: no guarantee of protection from aggressive audits; no provision requiring certification of commercial software as able to assist in collecting tax for all states; and nothing to prevent the states from rolling back the simplifications that have already been achieved.”
Consumers are also harmed by the lack of clarity regarding their tax obligations, Kranz said.
“While legally it is clear that consumers owe tax on purchases when the seller does not collect tax at the time of sale, consumers often do not understand that they are not following the law by failing to remit such tax. Those that try to comply are faced with a complicated, time consuming, and inefficient task – tracking all of their purchases where tax was not collected, determining whether each item purchased was in fact taxable, determining the appropriate tax rate, calculating and remitting the proper amount of tax. …It’s absurd that in today’s modern economy we don’t have an App for that.”
“I applaud the principles issued by the Chair that provide guidance related to the imposition of tax on remote sales. Those principles outline a path for Congress to create a workable framework for collection of sales tax. . . . A framework that provides certainty to business, consumers, and the states. A framework that relies on state-provided information, certified commercial software, and protections for business. A framework that preserves state sovereignty. And, perhaps most important, a framework that protects the American economy and American jobs. All of these are achievable, and only by Congress.” Mr. Kranz concluded. A copy of his testimony is available here.
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