States May Move toward Reporting Mandates on Remote Sellers to Boost Tax Compliance

June 30, 2011

If the Multistate Tax Commission, an independent organization of state governments, adopts a model statute opposed by the AICPA, non-resident retailers that sell products in a state could in future be required to notify customers of potential tax liability and report purchase information to both the customer and the state revenue department. 

“Out-of-state businesses that are not required to collect and remit sales tax should not be required to police individual use tax noncompliance,” Jamie Yesnowitz, vice chair of the AICPA’s State and Local Taxation Technical Resource Panel, told the commission in a May hearing.

For example, under the proposed model statute, if Minnesota were to adopt the model law, a person who purchased a computer from a company in Maryland, would receive a notice from the company stating how much tax is owed to Minnesota, as well as an annual report stating details of all transactions he or she had with the company.  The Minnesota tax office would also receive a similar report and would be aware whether state sales tax was paid. Those retailers who fail to report would be subject to penalties and interest set by the state.

“It is not clear how receipt of information on thousands of Internet purchases will translate into revenue for the states,” Yesnowitz said, noting states may not have the resources to receive and properly analyze such an enormous quantity of reports.

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

The AICPA opposes the model statute because:

  • The model statute 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.  (The Direct Marketing Assn. v. Huber, docket no. 10-cv-01546-REB-CBS (D. Colo. 1/26/11)). The district court agreed with DMA that a court will likely find the law places an undue burden on interstate commerce.

  • It 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.

Commission hearing officer Shirley Sicilian recommended to the commission’s Executive Committee that the statute be adopted.  In her recommendation, Sicilian contended that the burden on remote sellers would not be any more than the one currently imposed on in-state sellers.  While stating that other methods suggested by AICPA, such as remittance lines on individual and business entity income tax returns, clearer tax form instructions, targeted amnesty programs, and advertisements were “good  suggestions,” she countered that the “notice required under the proposed model…is critical to eliminating the impression that tax is not due.”

What’s next?

The MTC is surveying states that belong to the Multistate Tax Compact to see if they would consider adopting the proposal – if a majority of the affected states say “yes,” the full Commission will consider adopting the statute at its annual business meeting in late July. The District of Columbia and 19 states belong to the Compact; however, two of the 19 states do not have a sales tax and, therefore, would not be considered affected.