Goodlatte Proposes “Origin” Approach for Internet Sales Tax

On January 13, 2015, House Judiciary Chair Bob Goodlatte (R-VA) released a discussion draft of his long-awaited plan to simplify the collection of state sales tax on internet sales. The Online Sales Simplification Act of 2015 adopts an “origin” based approach to collecting sales tax, as opposed to the “destination” approach included in the Marketplace Fairness Act of 2013.

As the law currently stands, online retailers are only required to collect sales tax in jurisdictions in which they have a physical presence. The Marketplace Fairness Act of 2013, which passed the Senate in May of 2013 and has since stalled in the House, attempts to circumvent the physical presence requirement by allowing states that meet certain simplification standards to require remote sellers to collect the sales tax of the state where the buyer is located (i.e., destination-based sourcing). However, Rep. Goodlatte feels that lawmakers should not allow a state to reach out and regulate businesses outside of its jurisdiction.

Under Goodlatte’s approach, sales tax would be collected based on the laws and rates of the seller’s location, and the destination state would generally be precluded from assessing any additional tax. States will only have the authority to require a seller to collect sales tax on a remote sale if the state is a participant in a tax distribution agreement.  The sales taxes would be remitted by the sellers to the taxing authority in the origin state. The origin state would then submit the taxes to a multistate sales tax commission, which would further distribute the taxes to destination states. If the destination state does not participate in the distribution agreement, the origin state keeps the proceeds.

An origin-based sourcing rule is a fresh approach to the ongoing debate about the collection of sales tax on online sales, but it is at odds with the destination rule which typically governs interstate sales. Further, there may be constitutional issues with the proposal. The National Conference of State Legislatures has released a letter calling the proposal an unconstitutional attack on state’s rights. Potential constitutional issued include customers in the same state possibly paying tax at different rates and customers in no-sales-tax states having to pay tax.

While the Online Sales Simplification Act is unlikely to gain significant traction, as even the House Republicans are divided over the draft, it should at least serve to foment discussions on creative solutions for creating a uniform tax collection framework for online retailers.

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