Hybrid-Origin Based Sourcing! What is Rep. Goodlatte thinking?

By February 3, 2015 Legislative, Retail

Virginia Representative Goodlatte is circulating a “discussion” draft of a Bill intended to plug the “loop hole” related to uncollected sales tax on remote sales.  If adopted as drafted, this measure would transform the entire multistate sales tax collection and remittance mechanism, trash the notion of state sovereignty, and create a tax bureaucracy that will rival the IRS.  In my humble opinion, Goodlatte’s Bill does to sales tax what the Affordable Care Act did to healthcare.

Is the multistate sales tax system we have perfect?  Absolutely not.  Are their problems? Yes!  Are states losing revenue? Yes.  Do we need an entirely new system to deal with the problem?  NO!  From what I can gather, Congress is laboring under the notion that states are losing over $20 billion of sales tax revenue a year.  At a 7% sales tax rate this translates into over $285,000,000,000 of untaxed Internet/Remote sales.  That is absurd!  With Amazon as the largest Internet retailer now collecting tax in 23 states, with all of the “big box” retailers collecting tax, and with companies putting use tax systems into place, the amount of lost revenue is a fraction of this total;  I’ve heard as low as $5 to 6 billion.  That’s still a lot of revenue, but not so much that it justifies a complete change in the state sales tax collection mechanism.

Per Goodlatte’s bill, when remote sales are made the sales tax is collected based on the rates and the rules of the “origin state”.  The tax that is collected is then sent to a clearing house agency where it is distributed to the states based upon a formula agreed to by member states.  Gee, what could possibly go wrong with this plan?  The origin state is not the state where the shipment originated, rather, the “origin state” is the state where the seller has most of their employees!  Under this rule, all of Amazon’s sales would be taxed in Washington state since that is where Amazon has the most employees.  If you’re going to have an “origin” based tax, at least make it the state where the goods where shipped from.

Under this rule, consumers in Montana, Alaska, New Hampshire, Oregon, and Delaware would be charged tax based on the location of the shipper.  I’m still wondering how exemptions will work for items that are not taxable in the destination state but are taxable in the origin state; or vice-versa. Adopting a new system at this point in time would create significant confusion and would probably end up costing states more money than they are losing now.  Under Goodlatte’s draft, there does not seem to be an option for retailers that are currently collecting and remitting tax to opt-out.  They would have to stop what they are doing and change to this new system.

I’m not sure what the solution is to this problem, but I know what is NOT the solution.  What is not the solution is Rep. Goodlatte’s origin based approach.    I can hear it now, ” if you like your sales tax system, you can keep your sales tax system (period)!”

Ned Lenhart, CPA
President Interstate Tax Strategies.