WASHINGTON - An online sales tax proposal from House Judiciary Committee Chairman Bob Goodlatte is drawing criticism from a top Senate Democrat and officials with state and local government groups.
The plan is "a totally radical change from what people are accustomed to," said Larry Jones, assistant executive director of the U.S. Conference of Mayors, after a panel discussed the plan at the group's winter meeting Thursday.
Senate Assistant Minority Leader Richard Durbin, D-Ill., spoke about the online sales tax issue at the session, and officials with several state and local groups discussed Goodlatte's plan with The Bond Buyer prior to the conference.
Currently, state and local governments can only require retailers to collect their sales taxes if the businesses have a physical presence in their states. Under a bill that passed the Senate in May 2013 called the Marketplace Fairness Act, states could require online retailers to collect their sales taxes if the states simplified their sales tax laws. But the bill stalled in the House because Goodlatte, R-Va., had problems with it.
Goodlatte's discussion draft, released last week, takes a very different approach than the MFA. The MFA uses destination sourcing and has retailers collecting the tax at the rate of the purchaser's state. However, Goodlatte's proposal would allow sales taxes on remote purchases to be collected at the rate of the "origin state" -- or the state where the retailer had the greatest average number of employees on business days in the previous calendar year -- if the state entered into a multistate agreement. The sales tax revenue collected on out-of-state purchases then would be redistributed to the purchasers' destination states through a clearinghouse.
One of the main criticisms of Goodlatte's proposal is that it would raise taxes for many people because consumers would have to pay the sales taxes of another state that could have a higher rate than their own state, sources said. For people who live in states without sales taxes, they could have to pay a tax they previously did not owe.
"This is such an upside-down approach, and it doesn't make sense," said Sen. Richard Durbin, D-Ill. Durbin was one of the leading sponsors of the MFA, and he thinks Congress should stick to the approach of that bill.
Origin sourcing "could create some real issues," said David Quam, deputy director of the National Governors Association.
"For some consumers, they're going to see their taxes go up," he said. In contrast, under the MFA, consumers would be paying the tax in their state, which is already owed as use tax.
Another main criticism of origin sourcing is that retailers could just move their operations to states without sales taxes or a low sales tax rate, said Dustin McDonald, director of the Government Finance Officers Association's federal liaison center.
McDonald said that Goodlatte was interested in an origin-based plan to address concerns that small retailers could be subject to out-of-state audits under the MFA. GFOA hopes to work with Goodlatte's staff to reach a destination-based solution.
In September 2013, Goodlatte released a set of seven principles he wanted to guide the Internet sales tax discussion. One of those principles is simplicity. But Max Behlke, manager of state-federal relations for the National Conference of State Legislatures, said Goodlatte's proposal did not meet that principle.
"I don't see any simplicity whatsoever," Behlke said. He also said that the proposal "completely overturns how state tax law is structured."
The NCSL thinks Goodlatte's proposal violates the equal protection clause of the 14th Amendment of the U.S. Constitution, Behlke said.
Durbin said he hopes that Senate Majority Leader Mitch McConnell , R-Ky., will let Durbin and his colleagues offer the MFA again and have it attached to another bill.
Rep. Jason Chaffetz, R-Utah, is expected to introduce a bill that, like the MFA, would use destination sourcing. Behlke said that Chaffetz's proposal has "a lot of support" from stakeholders.
Marketplace fairness is one of the U.S. Conference of Mayors' top priorities, along with maintaining the tax exemption for municipal bonds, Albuquerque Mayor Richard Berry said. Durbin said online sales tax revenue could be used to back bonds that could be used to help communities deal with their unfunded pension liabilities.
