The NCSL Blog

12

By Max Behlke

Every state provides services that we, as constituents, enjoy and it is up to each state to decide how to pay for these services.

Since the 1930s, most states have made sales taxes one of their primary revenue sources. Therefore, when states are unable to collect the sales tax dollars they are owed under their established systems, state budget autonomy and the freedom to determine how to govern is threatened.

Unfortunately, as Congress has yet to pass legislation to solve the online sales tax collection loophole, the right of states to structure their own revenue systems is more threatened than ever.

If you live in a state that imposes a sales tax, when you buy something, you owe sales tax to your state at the rate prescribed by your state’s law, plain and simple.

So what changes when you buy something from a business located outside of your state? Nothing. Even though most consumers do not remit owed sales tax dollars to their state when they buy something in another state, that does not change the fact that they are legally obligated to do so. And the more money that states are unable to collect, the more they will be forced to find other means to raise revenue.

In May of 2013, the U.S. Senate overwhelmingly passed legislation to solve the sales tax collection problem, the Marketplace Fairness Act, yet it stalled for  more than 19 months in the House Judiciary Committee and did not even receive a hearing, much less a vote.

Instead, the committee spent over a year and half considering an alternative proposal to solve the sales tax loophole called “hybrid origin sourcing.” And while a draft of this proposal has yet to be made public by the committee, the NCSL Executive Committee Task Force on State and Local Taxation held a public hearing on the concept on Jan. 9 to determine if it is a viable solution and how it would affect states.

After more than three hours of testimony from leading state tax experts, proponents, and opponents of the hybrid origin sourcing concept, the task force learned that it would radically change the way sales taxes are imposed, effectively raise taxes on most people and create complex administrative burdens on states.

This is drastically different from the Marketplace Fairness Act, which not only preserves the rights of states, it allows states to collect the sales taxes from consumers at the rates that they are already required to pay under their state’s law.

Conversely, the hybrid proposal would allow lawmakers in other states to dictate the tax rate that consumers pay. In other words, taxation without representation.

In summary, the task force learned that the proposed system that tax experts and states have been working on for nearly two decades, as reflected in the Marketplace Fairness Act, is the best way to solve the remote sales tax collection issue and would not raise taxes on millions of consumers, unlike hybrid origin sourcing.

It is hoped that the Jan. 9 hearing will prove to the House Judiciary Committee that enacting a hybrid system for state sales tax collection is poor public policy and that they should return to consideration of legislation that not only overwhelmingly passed the Senate but that would not allow Congress to dictate how states should govern themselves.

Max Behlke is manager, State-Federal Relations, for the National Conference of State Legislatures Washington, D.C., office.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.