Proponents of Streamlined Sales Tax Legislation Remain Unwilling To Pursue Genuine Simplification, While Exaggerating The Amount Of Uncollected Use Tax on eCommerce Sales

Earlier this month, Massachusetts Congressman Bill Delahunt introduced H.R. 5660, “a Bill to promote simplification and fairness in the administration and collection of sales and use tax, and for other purposes.”  H.R. 5660 represents the latest effort by Congressional allies of the Streamlined Sales and Use Tax Agreement (“SSUTA”) to promote legislation that would overturn the substantial nexus standards that limit states’ power to impose sales and use tax collection obligations on out-of-state sellers, as reaffirmed by the Supreme Court in Quill v. North Dakota

Sadly, H.R. 5660 represents no real promotion of simplification of state sales and use tax systems over the level of improvement introduced in prior bills which fell far short of the mark. Indeed, H.R. 5660 is nearly identical to a bill introduced by Mr. Delahunt in 2007 that endorsed the SSUTA, the shortcomings of which Brann & Isaacson senior partner, George Isaacson, explained to Congress in December 2007.  Among the fundamental steps toward true simplification that the states have still refused to adopt (and that H.R. 5660 fails to require) are a reduction in the number of state and local taxing jurisdictions, a single sales tax rate for all jurisdictions in a state, uniformity in the tax base, and uniformity in the measure of tax for like transactions, to name just a few.

Furthermore, while further simplification remains elusive, there is growing evidence that states have substantially overstated the amount of revenue they “lose” through uncollected sales and use tax on Internet and other direct marketing sales by out-of-state vendors who are not required to collect such tax under Quill.  The SSUTA contingent has long relied upon a study conducted by a group at the University of Tennessee (the “UT Study”), which was most recently updated in April 2009.  The UT Study estimates that states will fail to collect between $45-50 billion in sales and use tax on direct marketing sales during the five year period from 2008-2012.

A more recent study, prepared by Jeffrey Eisenach and Robert Litan at Empiris LLC, entitled “Uncollected Sales Taxes on Electronic Commerce: A Reality Check” (the “Empiris Study”) and published in February 2010, presents a compelling critique of the UT Study.   The Empiris Study’s Executive Summary powerfully summarizes the study's conclusions, including the fact that total potential uncollected sales tax revenues in 2008 were less than three-tenths of one percent of all state and local tax revenues.  Also, it found that more than one-third of such uncollected tax revenues are associated with small businesses that would likely be excluded from use tax collection obligations under a “small business” exemption in federal legislation.  Overall, the Empiris Study convincingly shows that the amount of projected uncollected state and local sales and use tax is far less than claimed by states or projected by the UT Study.  Indeed, the Empiris Study concludes that “the increased collections associated with overturning Quill would be substantially lower than previously thought,” and would be approximately 33% of the amount estimated by the UT Study.

Such relatively modest amounts of additional tax revenue do not justify imposing the still-significant regulatory and compliance burdens associated with state and local sales and use tax collection that, in part, motivated the Supreme Court’s decision in Quill.  The proper solution to the ongoing complexity of state and local sales and use tax systems is true simplification, which H.R. 5660, unfortunately, does not provide.

Is Amnesty Really Amnesty?

States frequently announce amnesty programs. In return for settlement of back taxes, taxpayers obtain waiver of penalties and sometimes a reduction of interest. It has now become increasingly common, however, that states provide a stick to go along with the carrot of penalty waiver. Thus, Pennsylvania completed an amnesty period on June 18 in which it provided for waiver of penalties for payment of back taxes. The Governor of the Commonwealth, Ed Rendell, has announced that in the future, an additional 5% penalty will apply to all tax delinquencies that remained after June 18. In addition, he pointed out that the DOR will begin to seek to hold corporate officers personally accountable for taxes businesses owe and take other aggressive means to enforce the taxes.

Back in 2005, California announced a similar program, by which it increased the accuracy penalty from 20% to 40% and assessed an additional 50% “interest penalty” for all those taxpayers who did not apply for amnesty. Other states have followed a similar approach.

Is an offer of relief from liability coupled with a penalty for failure to take the offer really amnesty? Webster’s defines amnesty as a pardon from an authority. The consideration by the taxpayer for such pardon is the payment of back taxes. The sort of punitive measures, however, that some states impose for failure to acknowledge liability is not a pardon. Serious questions of taxpayer fairness are raised. Why should there be an additional penalty and in some cases threat of personal liability when a taxpayer has a legitimate dispute and chooses not to seek “amnesty”? The Due Process Clause of the U.S. Constitution is designed to provide every citizen their “day in court.” Imposing a penalty for the exercise of this due process right seems to be inconsistent with the basic principle of fair dealing that should be the very foundation of our tax system.