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April 23, 2014
Marketplace Fairness Act: The Fallacy of Simplification and the Private Reporting-Based Solution
by James H. Sutton Jr.

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James H. SuttonJames H. Sutton Jr. is a CPA, attorney, and shareholder in the law offices of Moffa, Gainor & Sutton PA. Sutton is the state and local tax chair of the American Association of Attorney-Certified Public Accountants Inc., and an adjunct professor at Stetson University College of Law and Boston University. Sutton can be reached at

In this article, Sutton argues that sales and use taxes should be simplified, but he argues that national proposals fall short and offers his own solution.

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The explosion of interstate commerce of the second half of the last century created difficulties in our state sales and use tax legal system. From traveling salesmen to mail-order catalog companies, everyone felt the strain of uncertainty -- including our court system, which issued over 300 commerce clause opinions by 1959.

The explosion of electronic commerce further deteriorated the sales and use tax system. There is a growing unfairness to brick-and-mortar vendors that operate inside a state's borders and must collect tax while a consumer can buy the same goods online without paying sales tax. There are also billions of dollars of use tax going unreported and uncollected because the states do not have the necessary information to enforce the use tax laws.

The Marketplace Fairness Act (MFA) as passed by the Senate in 2013, generally requires remote sellers to collect and remit use tax to the states and seems to solve the issues for brick-and-mortar vendors and the states but does so in a way that allows 45 states to have significant powers over remote vendors everywhere. The compliance burdens alone would be crippling for remote vendors, even with the assistance of federally funded software. Combined with the additional audit, collection, and criminal issues that remote vendors would face in 45 states under the MFA, it would impose an unbearable burden on interstate commerce.

Need for a New System

Fortunately, the U.S. House of Representatives recognized just how harmful the MFA could be and stopped the bill during the 2013 legislative session. However, recognizing that the sales and use tax problems in this country do need to be addressed, House Judiciary Committee Chair, Bob Goodlatte, R-Va., called a hearing and requested expert testimony on the topic. I was honored to be included as one of those experts.1

During the March 12 Judiciary Committee hearing, both Stephen P. Kranz and Joe Crosby spoke about how little things have changed in the last 15 years. They should know, because they've been involved in trying to simplify the sales and use tax regimes for more than a decade. As I gave my testimony and listened to theirs, it occurred to me that all the efforts to fix our country's sales and use tax problem over the last 40-plus years (the Streamlined Sales Tax Project, Streamlined Sales and Use Tax Agreement, Council On State Taxation, MFA, etc.) have been operating under the same premise -- the belief that the solution must come through forcing the states to simplify their sales and use tax laws.

Don't get me wrong, sales and use tax laws in this country are far too complex and should be simplified. However, ask any politician how many times they have been approached by a lobbyist or business group to get a small change in their state's tax laws, and you probably already know the answer. With 45 states that have sales and use tax and almost 10,000 local sales and use tax jurisdictions nationwide, sales and use tax laws are constantly changing. And every change that may simplify matters for a select few can add complexity for everyone else. Whether we like the complexity or not, each state has a sovereign right to make its tax laws as simple or complex as its voters, legislature, and governor decide. Simplification is not something that can be forced onto the states. Unfortunately, simplification has been the primary goal of efforts to fix our sales and use tax problems at the national level.

If the goal of forced simplification is actually unachievable, then that explains why the efforts to fix our sales and use tax problems have been unsuccessful though valiant. If anything, sales and use tax is more complex now than it was 15 years ago despite these efforts. If we challenge the basic simplification premise for sales tax reform, then we are left with one simple truth: Forced sales and use tax simplification on a national level is fallacy.

But where does that leave us? An array of problems are still out there. Brick-and-mortar retailers have a legitimate complaint with use taxes not being enforced at the state level. This is probably the single biggest reason the sales tax problem is being considered at the federal level. The states are missing billions of use tax dollars that could be used to fund roads, schools, and other valuable state services or to lower other state or local taxes. Further, our national marketplace is in a state of uncertainty because the U.S. Supreme Court has not heard a sales tax nexus case for more than 20 years. Consequently, states are relentlessly passing more and more aggressive laws targeting remote sellers. And let's not forget the small remote sellers of this country who have been falsely blamed for all that mess and almost had to bear the brunt of the expense of fixing the problem if the Senate had gotten their way in 2013 with the MFA. Something must be done. However, if forced simplification is not possible, then, as the title for the March 12 Judiciary Committee hearing suggests, we need another solution.

To find a solution, we must first identify the root of the problem. The problem of our sales and use tax system is amazingly obvious. Every state with a sales and use tax already has all the laws, rules, and procedures in place for use taxes. The issue is that the states are unable to enforce their own use tax laws because they cannot cost-effectively obtain the information needed to hold their own citizens accountable. That is because having state revenue departments initiate fishing expedition use tax audits at the individual level is not cost effective and would be politically problematic. Therefore, the states have been left with no solution other than creating aggressive nexus statutes that target remote vendors -- while lobbying Congress to obliterate the commerce clause by enacting the MFA.

The MFA is highly problematic. Forcing remote sellers to collect use tax gives up to 45 states jurisdiction over those remote sellers, which creates a whirlwind of problems. Software can assist with filing sales tax returns, but the software will not become responsible for the remote vendor's mistakes. Nor will software handle the assault of 45 sales tax audits (almost eight a year if audited every five years). However, with up to 50 percent of businesses closing within five years,2 and with many of them owing taxes, the software could be helpful in one way. The software would be valuable to criminal investigators from states that want to prove how much use tax a failed remote seller collected but did not remit when the business closed. It is frightening that under the MFA a failed small remote seller could easily face up to 100-plus years of jail time spread among 30-plus states for just one or two months of unremitted use tax. Those are a few of the many unforeseen MFA problems.

If you are not yet convinced that the MFA is a bad idea, then consider that the European Union is Europe's attempt to create a free, unregulated market between the member countries in order to be more like the United States. The MFA does the exact opposite by creating myriad complex regulatory and compliance hurdles for almost all interstate businesses. So while forced simplification is arguably unachievable at the national level, the MFA would create a slew of new complications that threaten to cripple thousands of businesses in this country.

With the problem identified, the federal solution should be obvious -- create a federal law to help the states gather the missing information. That is what Colorado recently tried to do at the state level.3 Unfortunately, Colorado cannot force out-of-state vendors to report information to the state because of commerce clause limitations. Further, Colorado did not go far enough to protect the privacy of the individual purchasers or to reduce the complexity for the state or the purchaser.

I propose that we improve on Colorado's effort, but at the federal level. The federal law should not stop at only gathering the remote purchase information for the state. My proposed federal law, referred to as Consumer Private Reporting (CPR), would take the next step by providing a simplified whole dollar amount of taxable purchases in a Form 1099-style format to both the state and the purchaser to facilitate use tax payment. Because the state would have a specific dollar amount of purchases, no full audits at the individual level would be necessary. If a purchaser fails to file a use tax return, then a simple letter to the taxpayer would initiate the collections process.

At the remote vendor level, the same state-approved software providers suggested under the MFA could be used to determine taxability within the remote vendor's own computer system. The CPR remote sales tax reporting system could be implemented in a way that no private purchaser information would leave the remote vendor except the dollar amount of the taxable remote purchase. The law would require software providers to submit information from all remote vendors in a standardized format but without the details of what was purchased or even the specific vendors. Under the CPR, customers' privacy would be better protected than under the MFA. That is because under the MFA, states have the right to audit remote vendors and view all records, including individual customers' purchase invoices.


The Basics of a CPR System

  • Remote sellers would report taxable remote sales in a way that does not disclose purchase specifics.
  • Reporting would be done by the company or through approved software vendors that specialize in determining what purchases are taxable.
  • The reporting would be done into a new national database, which would combine taxable purchase information from all remote vendors to determine total taxable purchases for the year for each purchaser.
  • The purchaser and state would receive a gross taxable remote purchases amount for the year in a Form 1099-style format.
  • The purchaser could challenge taxability of specific purchases.
Additional CPR Details

  • The law would standardize reporting format.
  • The system would be state funded.
  • States could audit the software companies for compliance with state law, but the states would have no jurisdiction over the remote vendors or authority to review individual purchase records.
  • States could review the self-reporting remote vendor's tax coding process but would have no right to review any specific purchase information.
  • Substantial noncompliance could result in revocation of self-reporting status.
  • If a remote seller has nexus with a state, then normal sales and use tax collection rules would apply.
  • The federal law would create a physical presence nexus standard similar to Quill.
  • Purchaser's information would be based on several sources: federal tax identification number (for businesses), credit card number, or a completely separate U.S. sales tax identification number.
Additional Considerations

  • Legislation could include a small-seller exemption.
  • Alternative concept: reporting gross sales without regard to taxability and allowing each state to exempt a percentage of the gross remote purchases.

The CPR database would accumulate the information on all remote purchases through the software vendors, and would issue a Form 1099-style report at the end of the year to both the state and the individual purchasers. Not only would that allow easy use tax reporting, but it would also stop the states from having jurisdiction over the remote vendors (leaving the commerce clause intact). The new federal law should also codify a simplified nexus rule for sales and use tax purposes that should at least limit nexus to the physical presence requirement under Quill.

A CPR system is the only truly viable sales tax solution in the discussion.4 It places the least burden on interstate commerce, compensates the remote sellers for time and expense needed for reporting, and allows the states the sovereign right to enforce their own use tax laws without impinging on the personal privacy of the purchaser.


1 The hearing in its entirety and both the written and verbal testimonies of the witnesses are available at

2 SBA Office of Advocacy, "Frequently Asked Questions" (updated Jan. 2011).

3 See Colo. Rev. Stat. section 39-21-112(3.5) (2010).

4 Two others submitted testimony at the March 12 hearing on the origin method as a proposed solution. Under this method, taxability is determined based on the location of the seller, not the buyer. While the origin method may appear promising, the ability to choose where the seller is located makes it susceptible to manipulation.


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