AICPA Opposes Model State Law to Require Reporting by Out-of-State Sellers

September 8, 2011

The Multistate Tax Commission (MTC), an independent organization of state governments, failed to adopt a model statute that would impose onerous information reporting requirements on business, but plans to reconsider the issue in December. 

The proposed law, opposed by the AICPA, would require retailers who sell products to customers in other states to: 1) notify those customers of potential use-tax liability and 2) annually report purchase information to both the customer and the state revenue department.  The model statute would give sellers an option to collect and remit sales tax in order to avoid the information reporting requirements.  

Echoing a Colorado law that has been challenged in court, the model proposes exceptions for small sellers and de minimis sales.  Colorado exempts sales under $500 and retailers with less than $100,000 in gross annual sales in the state. 

The commission surveyed the 20 states (including the District of Columbia) that belong to the Multistate Tax Compact to see if they would consider adopting the proposal.  Eight of the affected states said “yes,” but the Commission needed nine to adopt the statute at its annual meeting in late July.

The MTC later received two more affirmative votes; the 10 states that indicated they would consider such a law (or have already adopted one) are:  Alabama, Arkansas, Alaska, Colorado, Hawaii, Michigan, Missouri, South Dakota, Texas and Utah.  Alaska does not impose a statewide sales tax but some of its local jurisdictions do.  The MTC currently is determining whether Alaska’s vote can be counted.  Four states – New Mexico, North Dakota, Washington, and the District of Columbia – voted against the proposal and California abstained.  Two member states – Oregon and Montana – do not have a sales tax and did not vote.

How would the proposed statute apply if enacted by a state?  Let’s say a company in Maryland sells a laptop to a person in Pennsylvania, which has enacted the model law.  The Maryland company would have to notify the customer at the time of the transaction about how much use tax is owed to Pennsylvania.  In addition, the company would have to send an annual report to the customer stating details of all transactions that the company had with him or her, as well as send an annual report to the Pennsylvania tax office showing all transactions with in-state customers.

If the Maryland company failed to report, it would be subject to penalties and interest set by the state (unless the company opted to collect sales taxes on all taxable transactions made to customers within the state and to remit collected taxes to Pennsylvania).

While the AICPA supports tax compliance and fairness, it does not think the proposed model statute is the right solution to the online tax collection problem because: 

  • It is based on a Colorado law that may get overturned in court. The Direct Marketing Association sued Colorado and successfully persuaded a U.S. district court to halt enforcement in The Direct Marketing Assn. v. Huber, docket no. 10-cv-01546-REB-CBS (D. Colo. 1/26/11). The district court agreed the law may place an undue burden on interstate commerce.
  • The statute could undermine collaborative work underway (the Streamlined Sales and Use Tax Project).
  • The costs of compliance with the statute could far outweigh the benefits received by the states. 

“It is not clear how receipt of information on thousands of Internet purchases will translate into revenue for the states,” Jamie Yesnowitz, CPA told the MTC on behalf of the AICPA, noting states may not have the resources to receive and properly analyze such an enormous quantity of reports.  Yesnowitz is the Vice-Chair of the AICPA’s State and Local Tax Technical Resource Panel. 

Businesses would have to devote significant resources to comply.  One example is reprinting paper invoices, purchase orders and sales/lease receipts to display required language – language that may likely be ignored by most purchasers.

MTC General Counsel Shirley Sicilian, in her recommendation to the MTC Executive Committee, stated that the reporting burden on remote sellers would not be any more than the one currently imposed on in-state sellers who have to collect and remit sales tax.  While other methods are available to increase consumer awareness, “the model helps to eliminate the perception and practical reality that in-state sales are subject to tax while interstate remote sales are not,” she said.

A few other states besides Colorado have adopted laws somewhat similar to the proposed model, including South Dakota and Oklahoma, and two others are considering such legislation, according to the MTC.  Commission officials indicated that the MTC Executive Committee will reconsider the proposal at its December meeting.  Depending on the Executive Committee’s decision, the full Commission may vote on the statute at its July 2012 meeting.