On January 13th, House Judiciary Chairman, Representative Bob Goodlatte, circulated a draft of the Online Sales Simplification Act of 2015. As reported in a Bloomberg BNA article, Goodlatte Turns to Origin Sourcing In New Proposal on Online Sales Tax, the draft seeks to adopt “a hybrid version of so-called origin sourcing” and a participating states’ distribution agreement to address the States’ online retailer sales tax concerns.
According to the article, a Judiciary Committee aide told the publication that OSSA is meant to “serve as a starting point for discussion on the Internet sales tax issue” and that Goodlatte welcomes feedback and new ideas. The timing and intent of OSSA is well worth noting – both appear to be signs that the 114th U.S. Congress’ Judiciary Committee will take a different road than the one set forth in the 2013 Marketplace Fairness Act.
As we noted in our previous posts, The Marketplace Fairness Act Hearings – Why They Should Be On Your Radar and The Marketplace Fairness Act Hearings Highlight Diverse Solutions. Is the MFA The Answer to The Wrong Question, the MFA provisions affecting remote sellers have been a significant concern for online retailers. Many of the MFA provisions have been meet with widely divergent comments by sales tax experts, industry groups and lawmakers.
OSSA Key Concepts
Like the MFA, OSSA attempts to address the issue of States’ lost sales tax revenue arising from their residents purchasing taxable items from out of state online retailers who are not registered to collect sales tax in their state. (It should be noted, the aforementioned residents should self-assess use tax on such purchases and remit that use tax to their resident states.) However, OSSA demonstrates a comprehensive departure from the approach set forth in the MFA as evident by its key foundational components.
OSSA relies on the implementation of two key critical foundational components – Origin Based Sourcing and Participating States’ Adoption of a Distribution Agreement- to resolve the States’ loss sales and use tax revenue from residents purchases from out of state online sellers.
Origin Based Sourcing
Unlike the MFA, OSSA does not try to require remote sellers to charge or collect sales tax based on the destination of the sale or location of the remote seller’s customer. Instead, OSSA applies an origin based sourcing paradigm. As set forth in the following excerpts from OSSA Section 2
Sec. 2: Limitation on Collecting Tax on Remote Sales
(a) A state may tax a remote sale only if it is the Origin state of the sale and party to the Distribution Agreement (i.e., the clearinghouse that nets out the $).
(b) Tax is applied at the Origin Rate (including local rate).
(c) Privacy Protection – No personally identifiable information is reported to the clearinghouse. Just the amount of the sale, destination state and (zip code). Exception is made for sharing, in the course of an audit only, “compliant taxpayer certificates” established in sec. 4.
(d) Sellers may be audited only by their home state taxing authority
OSSA’s second foundation concept is the adoption by participating states of a “Distribution Agreement” (i.e. Clearinghouse). The BNA Bloomberg article concisely summarizes the core aspects of OSSA’s Distribution Agreement. First, OSSA calls for “a commission, to be appointed by participating states, to determine the states’ shares of online sales tax revenue. Each origin state would forward each destination state its proportional share, based on a distribution agreement reached by the commission.”
The commission would craft a distribution agreement within 90 days of the panel’s creation. Each month, states would determine how much of the total tax imposed on remote sales is due them, based on sales attributable to that state under origin sourcing.”
As the Distribution Agreement is the backbone of OSSA, it would appear that states would have to “participate” or join in to the Distribution Agreement if they wish to collect tax on remote sales.
The following is an excerpt of some of the key provisions from Section 3 of OSSA:
Sec. 3: Distribution Agreement (i.e., Clearinghouse)
(a) Each State Governor appoints 4 representatives to a commission. At least one must represent remote sellers, the other three represent interests of government, consumers and non-remote sellers in the state. Commission produces a distribution agreement with the following terms:
3) Each Origin State forwards each Destination State its proportional share (determined in (2)) of the sales tax that the Origin State collected during the period via the proven clearinghouse method used in the Fuel Tax context.
4) States that do not join the Distribution Agreement cannot tax remote sales or receive distributions from the clearinghouse.
(b) Commission has 90 days to produce the agreement. After that, states cannot collect tax on remote sales at all (e.g., via aggressive affiliate nexus laws) until an agreement becomes effective.
OSSA – One Strong Start Addressing Online Sales Tax
According to the House chairman circulates online sales tax draft article contained in THE HILL, OSSA is receiving attention from numerous groups. One view expressed in the THE HILL article is that “The draft is unlikely to find much support among retail groups that have lobbied for the Marketplace Fairness Act.”
My initial view is more in line with that of Mr. DelBianco of NetChoice, as quoted in the article:
“With elegant simplicity, this bill treats sales tax obligations the same, whether you entered a store by foot, by mail, by phone, or via the Internet,” … “In short, this bill represents a compromise that gives states the revenue they’re missing, without punishing every small business that goes online to reach customers around the country.”
In my humble opinion, Representative Goodlatte should be applauded for quickly introducing OSSA in the 114th Congress. He should also be applauded for drafting OSSA’s strategic provisions that address the states’ sales/use tax concerns arising from online sales without compromising the Constitutional protections established under Quill.