Origin Sourcing Takes a Beating at Congressional Hearing

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NetChoice's Cox proposes a sales tax plan.
NetChoice's Cox proposes a sales tax plan.

House Judiciary Committee Chairman Bob Goodlatte (R-VA) may have called the hearing yesterday to consider alternatives to the Marketplace Fairness Act passed by the Senate last May, but it was former Justice Department tax litigator Steven Kranz who set the agenda.

“There is no question that states will continue to try forcing remote sellers to collect their sales taxes,” said Kranz, a partner in the law firm of McDermott Will & Emery who sits on the Streamlined Sales Tax Governing Board. “The question is whether Congress will provide the necessary framework to ensure that state collection efforts will be uniform, clear, predictable, and fair, or [whether] Congress will remain silent and allow state collection efforts to be confusing, unpredictable, burdensome, and potentially discriminatory.”

Brick-and-mortar lobbying organizations such as the National Retail Federation pushed for the Marketplace Fairness Act (MFA) to “level the playing field” with internet and catalog retailers by forcing them to collect state and pay state local taxes on all purchases. Current law requires remote sellers to collect taxes only in states where they have a physical presence. Today's hearing gave air to five remote sales tax collection plans that addressed Goodlatte's call for an alternative to the MFA that adhered to seven principles (see sidebar below) laid down by the Chairman. Three of the alternative plans posed origin sourcing—in which consumers would pay tax to the home state of the seller—as the answer to the complicated issue of meting out payments to more than 9,000 local tax jurisdictions.

Former Judiciary Committee member Chris Cox proposed one of those plans on behalf of online seller coalition NetChoice, for which he serves as legal counsel. The NetChoice plan seeks to use origin sourcing as a way to simplify sales tax collection for all stakeholders and to remove what Cox says is the chief obstacle for remote sellers: compliance. “In contrast to the complexity and costs created by MFA that requires expensive and potentially flawed software integration, our alternative is workable for the smallest of businesses,” Cox said. “Brick-and-mortar and e-businesses alike would use the tax rates and rules of their home state, just like they do today.”

Another proponent of origin sourcing, Andrew Moylan, senior fellow of R Street, argued that MFA would hinder economic growth by penalizing the rampant growth of Internet businesses. “Origin sourcing truly levels the playing field,” he told the committee. “The MFA would erase the physical presence standard for remote sales while ostensibly maintaining it for brick-and-mortar sales.”

Seven Rules to Tax By

Rep. Bob Goodlatte sets requirements for a remote sales tax law.

Click for the full scoop.

But several committee members feared that origin sourcing would lead remote sellers to flee to states with little or no sales tax, such as Montana and Delaware. “A lot of people have said that origin sourcing would unleash a ‘race to the bottom' and I believe it would,” said Rep. Jerry Nadler (D-NY). “When I was in the state assembly in New York, the regulation changed to have rates for credit cards based on the state where they were issued, and every bank moved to South Dakota or Delaware.”

But proponents of origin sourcing argue that rates are not the only issue for remote sellers. Several times during the hearing Cox interjected that what small Internet businesses have most to fear from MFA is being overwhelmed by the expense of complying with regulations and audits from multiple tax jurisdictions. “In addition to integration costs, you're talking about tens of thousands of dollars in litigation costs,” Cox said. “The liability for getting it wrong is always going to rest with the taxpayer. The software maker is going to say, ‘It's not my fault.'”

Another witness's proposal offered a potential solution to Cox's concern. Joseph Crosby, principal of MultiState Associates and former COO of the Council on State Taxation (COST), offered up a plan that would reduce compliance with an interstate agreement for remote sellers only that would give them a single point of registration for tax collection in all states. “The alternative framework should include a consolidated audit agreement providing that one state shall have the authority to audit a remote seller on behalf of all states,” Crosby said.

In sum, there was not much love for origin sourcing plans that are favored by remote sellers and trade organizations, including the Direct Marketing Association and the American Catalog Mailers Association. Committee members repeatedly turned to state tax veteran Kranz as a de facto judge of the panel's proposals—and his condemnation of origin sourcing was unequivocal.

“The proposals heard today would eliminate the sales tax system in this country,” Franz opined. “There are many great tax lawyers other than myself who will help companies game an origin tax system. It's why no country in the world has adopted one. Origin sourcing is dead on arrival and can't be adopted. Whatever framework the Congress adopts, if it adopts one at all, has to have a destination tax regime.”

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