CPA Suggests Congress Enact Consumer Private Reporting Legislation to Encourage Use Tax Compliance

It is an honor to be asked to testify at this hearing. As requested, attached please find the following written materials related to my testimony at the hearing on Exploring Alternative Solutions on the Internet Sales Tax Issue on March 4, 2014.

   I. Curriculum Vitae

Mr. Sutton has 8 years of experience working in State and Local Tax ("SALT") at a "Big 5" CPA firm and a tax consulting firm handling a wide variety of state tax planning and consulting work for Fortune 1,000 companies. Since 2001, Mr. Sutton has been an Adjunct Professor of Law at Stetson University College of Law, teaching State and Local Tax, Accounting for Lawyers, and Federal Income Tax I and also at Boston University College of Law's LLM of Taxation program, teaching Sales and Use Tax. Mr. Sutton ventured into the realm of construction as part owner, CFO, and in-house counsel for two construction companies, one residential and one commercial, giving him the opportunity to experience the "big picture" with all aspects of business and an improved ability to see things from a business owner's perspective. Mr. Sutton now dedicates his time defending companies and individuals against the aggressive tactics of the Florida Department of Revenue.

Bar Admissions:

• Florida

• United States Tax Court

• United States Supreme Court

• Bachelor's Degree in Accounting from Stetson University (1992)

• Masters in Accounting from Mississippi State University (1995)

• Juris Doctorate from Stetson University College of Law (1998)

• Master of Laws (LL.M.) in Taxation from University of Florida, Levin College of Law (1999)

• American Association of Attorney-CPAs -- Chairman of State and Local Tax Committee (2013 -- present)

• Florida Institute of CPAs -- State Tax Resource Council Member & Conference Committee

• US Tax Court Pro Bono Committee: Tampa Division -- Chairman (2011-2013)

• Florida Bar -- Tax Section Member

• American Bar Association -- Member

• Hillsborough County Bar Association -- Tax Section Member

• American Institute of CPAs -- Member

I appreciate the opportunity to submit this statement on alternatives to the remote sales and use tax problem that we are facing in this country. I applaud the efforts of this committee for taking the time to explore not only the alternatives to taxing internet-based transactions, but also all remote sales between states. The implications for this country are vastly complex. As a CPA and Attorney that does almost nothing but sales and use tax controversy, I hope to provide valuable insight into how your alternative solutions will impact remote sellers. I believe that this country needs the federal government to intervene to correct the sales and use tax problems we are facing.

• I am here before you today because I am a Florida CPA and Attorney whose law practice is devoted almost entirely to sales and use tax controversy in a state with projected sales tax revenues of over $22 billion this fiscal year. I handle audits, protests, litigations, collections, revocations, and even criminal defense -- all from a sales tax perspective. I'm not taking about a few of the Fortune 1,000 companies. Each year my firm represents hundreds of small, medium, and large businesses as well as individuals who all feel they are not being treated fairly by the Florida Department of Revenue. As a result, I see firsthand every single day how a state tax department can walk all over the rights of business owners. I could tell you hundreds of horror stories, but included herein are summaries of examples of (1) states ignoring taxpayer rights and (2) simple areas of statutory construction that leave small business owners helpless against the state taxing authority.

• Based on my experience and the many examples provided herein, I can tell you unequivocally that you do not want to give state tax departments free reign to regulate remote sellers throughout this country. It would be devastating to businesses both large and small. Perhaps software solutions can make filling tax returns possible, but the complications for audits, collections, investigations, and criminal prosecutions will not be handled by software and will threaten to cripple our interstate commerce economy.

• Both sales tax and use tax are excise taxes -- a tax on the right to do something. Sales tax is on the right to sell (or in some states, buy) a good or service within the borders of a state. Use tax is a tax on the right to use that good or service in the state, if sales tax has not already been paid. There must either be a sale or a use in the borders of the state for either tax to apply. Therefore, a remote seller is subject to tax in the state of its customer. The remote seller is not doing anything that would subject it to tax in that remote state. Only the purchaser is engaging in a taxable event -- exercising some type control over the problem in the state that is subject to use tax.

• There is something unfair happening to brick and mortar local businesses in this country, but it is not remote sellers hurting these local businesses. The pain is caused by the lack of use tax enforcement by the state tax departments on the state's own citizens. There is something unfair happening to the states, but it is not remote sellers hurting the states. Again, it is the inability of state tax departments to enforce use tax laws on the state's own citizens. The solution to both of these problems is clear. We need to figure out a way for the states to be able to enforce existing use tax laws. The amazing thing is that each and every state with a sales tax already has every law, every rule, the tax form, collection procedure, and well tested case law in place to enforce their own use tax laws. They only thing missing is the remote sales information.

• I am proposing that the sales and use tax system is not working and it needs CPR-federal Consumer Private Reporting legislation that will require remote sellers to provide sales information to the states and to purchasers so self-reporting of use taxes can become common place in this country. The reporting would be done on an aggregate basis through a federal database so the private information of what consumers purchased stays between the purchaser and the remote seller. The remote vendors could either use state-funded software to report the sales or they could use their own software to provide the sales information. The details of the Consumer Private Reporting system and alternative means of implementing it are provided herein. The proposal meets all 7 of the Goodlatte Principles, without placing extreme burdens on remote sellers and the national economy. It also resembles a reporting system being used in the EU.

• Colorado should be commended for attempting a similar statute. However, under the commerce clause, no state has the power to force remote sellers to report. Only the federal government has this authority. The C.P.R. system is similar to the reporting done in the European Union for more than a decade.

• Finally, any federal legislation must simplify the nexus rules for sales and use tax in this country, with a codification of the Quill¹ "physical presence" standard. Failure to do so will result in the state continuing their expansive laws that continually ignore the Supreme Court's ruling in Quill. The U.S. Supreme Court has abstained from taking a single sales and use tax nexus case for over 20 years, after urging Congress to address the nexus issue. Now is the time to do so and create simplified certainty for interstate commerce with regard to sales tax nexus.

Use tax is a tax on the right to use that good or service in the state, if sales tax has not already been paid. Use tax is not the obligation of an out of state seller because they have not done a taxable activity in the destination state. Selling something in Georgia to someone in Florida simply is not a taxable event for Florida. There is no legal mechanism in place to tax the Georgia seller for sales tax or use tax purposes in Florida (as long as the Georgia company does not have nexus with Florida). The taxable event in Florida is the purchaser using the good or service in Florida. Now Florida would love to force the Georgia seller to act as a collection agent for Florida's use tax that the purchaser owes. But the Georgia seller literally has not done anything that would subject the Georgia seller to tax.

This is a very real distinction that almost no one outside the full time state and local tax (SALT) profession knows. It is why the remote seller is not getting away with anything. They simply are not doing a taxable activity.

The in state brick and mortar company is disadvantaged not because remote sellers are not collecting use tax. Instead, it is because their own state tax department is not enforcing their use tax laws on people purchasing goods remotely. The state is disadvantaged not because remote sellers are not collecting use tax. Instead, it is because the state tax department does not have an easy means of obtaining the information on remote purchases subject to use tax in the state.

The Basics of a Consumer Private Reporting System

• Federally require remote seller to report remote sales. The reporting would either be done by the company itself (if approved to do so) or through approved software vendors that specialize in helping sellers determine which goods are taxable in which states. The specifics of what exactly is purchased never leaves the remote vendor's system, so the purchaser's private information stays between the vendor and the purchaser.

• Approved software vendors (or companies that self-report) would then report to a newly created federal database that would combine sales information in a 1099 style format for each state and each purchaser.

• The purchasers would then have the information to file their own use tax returns with the state and remit the use tax that has always been due. Because the purchaser knows the state has the information, filing use tax returns will be encouraged.

• If a purchaser does not file a use tax return, then every state that has a sales tax already has a process in place to send a friendly letter to the resident purchaser reminding them to pay the use tax. Each state could choose to be strict or lax about the use tax compliance, but the people being taxed would have a vote on the government officials representing them.

• The purchaser would have the right to reveal the specifics of a purchase to the state to prove that an item should not be taxed. Otherwise, the state would not have the specifics of what was purchased.

• Set federal standards for the minimum information and a standard format¹² of that information that needs to be provided to the software vendors and to the federal database. This will allow standardization for the whole industry.

• Approved software vendors will be funded by the states, not the remote vendors, potentially based on a percentage of (taxable and exempt) sales reported through the system (by state). Companies that are approved to self-report into the federal database would also be reimbursed for the cost of implementation.

• States would have the right to audit the software companies for compliance with the individual state's laws.

• For approved remote vendors that choose to self-report into the federal database, the states would have the right to review the remote vendor's tax coding process for good faith compliance. The remote sellers would not be liable for mistakes in taxability coding, but substantial non-compliance based on a reasonable standard could result in the remote seller being required to use an approved third party software vendor for tax determination and reporting.

• If a vendor elects to use an approved third party software provider, remote vendors could apply for reimbursement of expenses to upgrade software to account for the new reporting system during the first year -- to be funded by the states.

• If a remote seller has nexus with a state, then normal sales/use tax collection rules would apply.

• If a remote seller is discovered to have nexus, then the remote seller would be pardoned for all periods reported to the states through the new federal system, but then normal sales and use tax rules would apply.

• The federal law would create a bright line nexus standard at the federal level for sales and use tax purposes similar to the rules established in Quill vs. North Dakota, 504 U.S. 298 (1992) (physical presence required). If use taxes are being collected via self-reporting, then the state will not have a need to push for nexus of remote sellers. Create a bright line test at the federal level to create certainty for businesses.

• Purchaser's information would be accumulated based on several sources: federal tax identification number, credit card number, and/or, if opted by the purchaser, a completely separate US sales tax identification number issued by the authority overseeing this process.

• A small seller exemption could be part of the legislation, such that businesses with a minimum number of remote sales or a minimum dollar of remote sales would be exempt. Otherwise, the expense to occasional sellers and low dollar volume sellers would be too high and would keep these businesses from engaging in interstate commerce. For example, if a brick and mortar company ships a good to an out of state customer, then that would be a remote sale. For illustration purposes, an exemption might be available for a brick and mortar company that only does 50 or less of these a year or less than $100,000 a year. The same exemption, whatever it was determined to be, would apply to all remote sellers. If the sales tax rate across the country is 6%, then the unreported remote sales could result in $6,000 of use tax going unreported to all 45 states ($133 per state). The threshold for the exemption could be set at the estimated cost (time/labor) to implement the system versus the average unreported use tax potentially lost related to those sales.

• Instead of tasking remote sellers to determine taxability of remote sales state by state, have the remote sellers simply report gross remote sales by person, by state. The process would still need some type of federal database for accumulating the information so that the states do not receive any details on what was purchased. The federal database would issue a 1099 style report to the state and the purchaser so self-reporting of use tax would be easy and commonplace. To account for a portion of the sales that would be exempt under state law, each consumer would be allowed to elect a certain percentage be exempt. If the purchaser wanted to claim more exemptions, then the purchaser has the right to prove a higher exemption level. Each state could set their own exemption percentage to account for the typical exemptions available in that state. Remote sellers would be subject to the federal reporting requirements, not the remote state's jurisdiction.

Brick and mortar vs Remote Seller -- Take Sales and Use Tax Out of the Equation: Consumer Private Reporting Legislation would make every purchase subject to sales and use tax regardless of whether from a remote seller or a brick-and-mortar retailer. Both remote sellers and brick and mortar retailers would be required to comply with the sales and use tax laws of their state of domicile and anywhere that they have nexus. Remote sellers would have a small additional burden of utilizing the reporting software for remote sales. However, this small burden on remote sellers is nothing compared to keeping up with the sales tax laws in 45 states and 9,600+ local sales tax jurisdictions as well as going through sales and use tax audits for 45 states. Even if the remote vendor is only audited by the states every 5 years, that would still be an average of 8 sales and use tax audits a year, each of which can last anywhere from a few months to a couple of years. A Consumer Private Reporting system would remove these extreme burdens on remote sellers, allowing both the remote seller and the brick and mortar retailer to only have to deal with sales tax compliance/audit burdens in their nexus states -- a true level playing field.

Purchaser Private Information Is Protect: If someone purchases a good or service from a remote seller,then that person is trusting that vendor with their private information. Under a Consumer Private Reporting system, the individual's private information stays between the customer and the vendor. All that gets reported to the state is the fact the instate customer purchased $x amount of taxable goods/service per month from all remote vendors. No additional information is reported to the state UNLESS the in-state purchaser wishes to disclose information to show that certain purchases were somehow exempt or otherwise not taxable. In fact, a remote purchase will protect customer private information more than an in state purchase -- but a state tax auditor would have the right to review all customer purchase records on an in-state retailer. However, that will not be the case for remote purchases under a Consumer Private Reporting system.

Simplification of Sales and Use Tax State Laws In This Country: Consumer Private Reporting legislation would not turn state sales and use tax laws and 80+ years of case law precedent on its head. The realm of state and local taxation is complicated enough as it is. Instead the proposed legislation would simply make one small extension of federal law to require reporting of remote sellers through approved software vendors then use the existing use tax laws with every state that does not have a sales tax. As noted in footnote 2 above, the legislation might also be the perfect place to simplify the sales tax nexus rules, such as codifying the Quill decision.¹³ If a state is already collecting the tax through an effective self-reporting system, then the state will have much less incentive to chase after remote sellers for sales tax collection responsibilities. The legislation could also provide some type of limited indemnity for a remote vendor if it is later discovered to have nexus¹⁴ but only if that vendor can show that it was properly reporting sales through the Consumer Private Reporting system. Similarly, the legislation could allow a statute of limitations for remote sellers found to have nexus, but only if that vendor was already properly reporting sales.

            f. REVIEW OF GOODLATTE PRINCIPLES OF TAXING REMOTE SALES

The sales and use tax system in this country is struggling and it needs help. Only the federal government has the power to legislate in a way that can assist, but it must do so in a way that interferes with interstate commerce the least. I propose the Consumer Private Reporting system is that solution. It takes sales and use tax out of the competitive equation between brick and mortar vendors and remote sellers. It also allows the state to realize the dream of regular and systematic use tax reporting by its own citizens. However, the proposed Consumer Private Reporting legislation does so in a way that places the least amount of burden on remote sellers and interstate commerce, which is the ultimate purpose of the commerce clause in the first place.

In my humble opinion, the US Sales and Use Tax system is sick and needs Federal C.P.R.

Multistate Compact -- Collect and Redistribute: This is one of the more interesting of the non-consumer reporting proposals. My biggest concern is that it would create a "tax wagging the dog" situation. Remote selling businesses would migrate to states that did not tax their good or service. A state that exempts clothing would become the hub for clothing remote sellers. Companies that sell food remotely would all locate their companies to states that exempt food. There is a fundamental problem when a sales tax law encourages businesses to treat this country like a checker board. Worse yet -- in state retailers that sell those particular goods or services would be at a permanent disadvantage on sales tax because the in state retailer would still have to charge sales tax. This violates one of Goodlatte's Seven Principles of for Taxing Remote Sales. The states with no sales tax create a myriad additional problems. Within a few years -- we would have much the same problems with do now, because of the ease of planning to achieve for 100% tax avoidance.

Grant States the Power to Exclude Instead of the Power to Tax: [ Forgive me for sounding like a law professor on this topic. ] While I believe that the Commerce Clause would allow Congress the power to grant the states the right to exclude interstate transactions, I believe doing so would be fundamentally against what the Commerce Clause was intended to do in the first place. The Commerce Clause is in place to ensure the free flow of commerce between the states. Prior to the Constitution, we had the Articles of Confederation. One of the biggest problems with the Articles of Confederation was that it did nothing to stop states from indirectly taxing each other through transactions flowing through their states. For example, the sea port states would heavily tax goods arriving from the sea for destinations in non-sea port states. The founders of our country created the Commerce Clause specifically to prevent tax hungry states from putting their individual state needs ahead of the good of the country. In doing so, the founders of this country trusted you, members of Congress, to put the free flow of commerce among the states above the need of the individual states. Therefore, in my humble opinion, this proposal violates the fundamental purpose of the commerce clause.

Origin Base Collection: The origin based tax system is the most theoretically interesting suggestion on the table. In theory, it is amazing. However, the devil is in the details and unfortunately the details reveal that an origin based system would create many of the same major problems we have today. (1) Any origin based system would encourage remote sellers to migrate into states with no sales tax, completely avoiding sales tax on all sales to anywhere in the country. I could foresee Montana, with no sales tax, being renamed Amazontana. In other words, this does not fix the dilemma of Brick/Mortar companies having to charge sales tax versus on-line transactions (violating one of the Goodlatte Principles). Furthermore, any federal sales and use tax law should encourage businesses to treat this country like a checkerboard -- hoping from state to state just to avoid getting captured by a state tax. The law should be tax neutral at the business level, in my humble opinion. (2) I do not believe the commerce clause gives the federal government the ability to regulate a purely in-state activity. Therefore, even in an origin based system, the destination state would still have the sovereign right to tax the purely in-state use of the property -- i.e. a use tax. This could result in sales tax in the origin state and use tax in the destination state. I could predict the courts getting involved to require the destination state to provide a credit to the purchaser for sales tax paid at the origin state. However, the use tax problem would still exist in high tax states even if a credit is allowed for sales tax. (4) A federal required origin base sales/use tax system would encourage rampant state tax lobbying so certain products produced in the seller's state would be exempt from sales tax, exasperating the use tax problem in issue 2 above. (3) History tells us that states can be just as creative in ways to increase taxes as taxpayers are in avoiding taxes.¹⁶ The federal government would have no authority to stop a state from slightly changing the nature of their in state tax on in state property so a credit for sales tax paid to another state would not be available.

² SBA Office of Advocacy, Frequently Asked Questions, Updated January 2011 (http://www.sba.gov/sites/default/files/sbfaq.pdf)

³ Florida Tax Warrant # 1000000250554, Issued February 9, 2012 in Leon County, Florida. (It turned out the warrant was intended to be filed on the Florida Supreme Court Historical Society, but the computer system truncated the name. The Florida Supreme Court Historical Society gives tours of the Florida Supreme Court and the board of Directors are all former presidents of the Florida Bar).

⁴See, Sec. 213.29, Fla. Stat.

⁵See, Sec. 213.015(10), Fla. Stat.

⁶See, Sec. 213.015, Fla. Stat., also known as the Florida Taxpayer Bill of Rights.

⁷ If a company is audited on average every 5 years by 45 states, then the company will be a little over 8 audits a year on average.

⁸ Sec. 213.015(21), Fla Stat. ("The right to fair and consistent application of the tax laws of this state by the Department of Revenue").

⁹ Sec. 213.015(3), Fla. Stat. ("The right to be represented or advised by counsel or other qualified representatives at any time in administrative interactions with the department . . .").

¹⁰Royal Trade Investments of Sarasota, Inc. v. State of Florida Department of Revenue, (Case No. 2014 CA 001082NC, 12th Cir. Ct. Fla.) complaint filed February 21, 2014.

¹¹ It should be noted that if a taxing authority has jurisdiction over a vendor, remote or otherwise, then the notion of consumer privacy is a complete fiction. A state tax auditor has the right to inspect each and every customer purchase record during a sales and use tax audit -- regardless of whether the information is reported to the state. So, the proposed Marketplace Fairness Act (and any similar collecting and remitting legislation) would give the states the authority to review every single purchase record during an audit of an out of state vendor.

¹² The format should be ubiquitous and scalable, so it can be used everyone and installed on one machine or 300 different types of hardware.

¹³ Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (requiring physical presence in state before the state can force use tax collection requirements on a remote seller).

¹⁴ Such as an employee moves into another state, without the remote vendor realizing the sales tax nexus implications.

¹⁵ Note: There will be circumstances, just as there are now, in which a purchaser will receive a good or service in a state other than their domicile and be taxed in that state with no vote in that state's government. The same could be true of businesses that operate in multiple states, but have no owners or employees that are domiciled in more than the home state of the company. This situation is limited to rare exception in both the current situation and under the proposed legislation.

¹⁶ There are a number of states that switches to a modified gross receipts tax to avoid the state income tax jurisdictional limits of Public Law 86-272.

The question before Congress is how to balance the injustice of the loss of sales and use tax revenue to the states and the competitive disadvantage to brick and mortar companies against the need to place the least restrictive burdens on the new and amazing commercial market place. The membership of the AAA-CPA believe that while the Marketplace Fairness Act addresses the concerns of the states' loss of use tax revenue and the competitive disadvantage thrust upon brick and mortar companies, the Act does so in a way that will place crippling burdens on interstate commerce, especially on the new electronic commercial marketplace. While the media tends to focus on billion dollar companies like Amazon, there are thousands of small businesses that will be affected by this legislation. Many companies will be forced out of business completely if the new legislation is put into place. We respectfully submit that members of Congress vote against the Marketplace Fairness Act and consider enacting a less burdensome legislation such as a reporting statute.

Questions may be addressed to:

Explanation: Our members recognize that there is an injustice occurring in our economy with regard to the ability of states to collect use taxes on remote sales of goods and services. We also recognize the unfair competitive disadvantage to brick and mortar retailers in favor of remote sellers whose customers are able to purchase the same goods and services without the states having a reasonable means to enforce their use tax laws on the typical remote sale. At the same time, we have reached a profound time in our country's history when small, local businesses and consumers can cheaply and easily find each other and conduct business from anywhere in the country via the internet marketplace. This is the epitome of a highly advanced, capitalistic marketplace that benefits each and every person in this country as well as the country as a whole. We believe that this evolving electronic commercial marketplace should be allowed to grow and thrive with the fewest government restrictions possible.

The Commerce Clause of the U.S. Constitution (Art. 1, Sec. 8, Clause 3) was a profound expression by the founders of our great country that if our nation is going to have a thriving national economy, then we need commerce to be able to flow freely between the states without undue burdens. So the states gave up their power to regulate interstate commerce by creating the Commerce Clause with the expectation that Congress and Office of the President will act in the best interests of the national economy instead of merely the coffers of the many states. Almost since the start of the first state sales tax enacted by Mississippi in 1930, states have been battling the jurisdiction limitation in our court systems trying to force remote sellers to be collection agents for use tax purposes instead of enforcing the state's laws against its own citizenry. The U.S. Supreme Court, for the most part, has enforced the Commerce Clause to protect remote sellers from the reach of tax hungry states who already have jurisdiction over the in-state purchasers of the taxable goods and services. Time and time again, our courts have scolded states for trying to overstep their jurisdictional reach on remote sellers instead of enforcing their own use tax laws, while inviting Congress to step in to provide some reasonable relief to the controversy.¹ In the rare occasions when the courts have not protected remote sellers from over reaching state taxing authorities, Congress has stepped in to protect the remote seller.²

Proponents of the proposed legislation would like you to believe that free or low cost software can so simplify the collection process for remote sellers that the time and effort to comply will be minimal. This misconception could not be farther from the truth. It is true that a monkey, with a little help from software, can calculate the sales tax rates based on zip codes of the purchaser. Given the advances in technology, the difficult part is not the sales tax rate. The difficulties that exist now and will be exponentially broadened under the proposed legislation for hundreds of thousands of additional remote sellers that will become collection agents for 45 states³ and 7,500+sales tax jurisdiction are:

• what is subject to tax,

• what is exempt from tax,

• what proof is necessary for exemption,

• when is it exempt,

• how to determine the validity of exemption certificates,

• when is it subject to tax (deposit, full payment, shipment, installment payments, etc),

• who is the responsible party for the tax (e.g., drop shipments),

• what jurisdiction's laws apply (purchasers billing address, shipping address, or other),

• when and how to refund tax,

• how to prove sales were not subject to tax under "guilty until proven innocent" statutes,

• how to manage audits from 45 states based on varying laws in 7,500+ use tax jurisdictions,

• how to keep up with all the above with constantly changing state laws and local ordinances (in 2011, 459 sales tax jurisdictions made changes to their sales taxes),⁴

• How to account for the growing liability for mistakes handling all the above.

• How to enforce these state tax laws against the remote vendors with no personal jurisdiction in the remote states. Is the Department of Justice going to expend resources to enforce the state law?

• How is a state going to enforce the criminal laws in the case of sales tax theft on remote sellers? Is the Department of Justice expected to expend resources to enforce the state law?

Take for example a company with a mere $1 million in remote sales. The company will likely generate less than $70,000 of use tax revenue considering an average state tax use tax rate of 9.6% in 2011⁵ and a reasonable percentage of legitimately exempt sales. While a company will likely be able to find free or low cost software to calculate the rate of tax based on a customer's zip code, the cost of hiring an employee or outside professional that is capable of not only understanding the complexities of the use tax laws in 45 states and 7,500+ local use tax jurisdictions will likely be more than the tax revenue collected. If the company is able to absorb the cost of use tax compliance under the new legislation, then the company will likely have to hire additional personnel or outside professionals to contend with the onslaught of use tax audits from 45 states. Finally, companies will have the surprise expense of having to become responsible for the use tax when (not if) mistakes are made or exemption paperwork is missing. If you add up all the costs for complying with the new legislation, then the administrative burden placed on smaller remote sellers will exceed the use tax revenues remitted to the various states. In fact, for many smaller remote sellers with the drop shipment business model, the cost of complying with the proposed legislation could easily exceed the company's entire overhead before having to collect use taxes for all 45 states. The members of the AAA-CPA respectfully submit that something is fundamentally wrong with tax legislation that costs more for a company to administer than the taxing authorities collect in tax revenue.

Of course the pure brick and mortar companies believe the new legislation is a good idea because it places extremely expensive administrative burdens on remote sellers who will have to comply with use taxes in 45 states versus a brick and mortar companies only having to comply with one state's laws. The states are considering this situation from the pure self-interested point of view that "my state will get more revenue" without considering the effect it will have on the nation as a whole. This later concern is the exact reason why the founders of our country placed in the hands of Congress the sole power to regulate interstate commerce -- because our founders believed that Congress would act in the best interest of the country as a whole, not the individual states. Finally, the proposed legislation imposes a state's jurisdiction over companies whose employees and owners have no vote in the state whose use tax collection laws are imposed against them.

The fundamental fallacies of the proposed legislation are even more profound given that there is a dramatically less burdensome means for addressing the states' concerns while equalizing the tax disadvantage currently born by brick and mortar businesses. The AAA-CPA strongly believes that a use tax reporting requirement similar to the recently struck down Colorado legislation would achieve the goals that states and brick and mortar companies fundamentally want to achieve without the extreme burdens on businesses.⁶ Colorado, like every other state with a sales and use tax, has in place the means to efficiently send out letter audits to in state purchasers to collect use taxes due on remote sales. The only things the states don't have is access to the information concerning the remote purchases. The Colorado legislation required remote sellers to simply report sales into Colorado so Colorado could enforce its own use tax laws against its citizens or resident businesses. The US District Court of Colorado struck down the law finding that the notice and reporting requirement violated the Commerce Clause.⁷ In other words, the Court correctly held that only the federal government has the power to enact such legislation. We herein ask that each every member of congress strongly consider that the path boldly attempted by Colorado is the proper path Congress should be taking.

As the proponents of the Marketplace Fairness Act often argue, technology has advanced so much that remote sales can easily be tracked and taxed. We agree and with proper information, the states can use that new technology to efficiently enforce the states' use tax laws on its own citizens and business without have to place undue burdens on multistate commerce.

Summary: The question before Congress is how to balance the injustice of the loss of sales and use tax revenue to the states and the competitive disadvantage to brick and mortar companies against the need to place the least restrictive burdens on the new and amazing commercial market place. The State and Local Tax Committee and Executive Committee of the AAA-CPA believe that while the Marketplace Fairness Act addresses the concerns of the states' loss of use tax revenue and the competitive disadvantage thrust upon brick and mortar companies, the Act does so in a way that will place crippling burdens on interstate commerce, especially on the new electronic commercial marketplace. While the media tend to focus on billion dollar companies like Amazon, there are thousands of small businesses that will be affected by this legislation. Many companies will be forced out of business completely if the new legislation is put into place. We respectfully submit that members of Congress vote against the Marketplace Fairness Act and consider enacting a less burdensome legislation such as a reporting statute. A simplified bill requiring vendors to report remote sales to the states would give the states all the information necessary to collect use tax on remote sales while solving all the burdens on interstate commerce.

² For example, Public Law 86-272 was enacted in response to outcries from businesses over the decision held in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959) to limit the state's jurisdiction reach for income tax purposes when the business' only contact with the state are the mere solicitation of orders by salesmen as long as the orders are approved and shipped from out of state.

³ Alaska, Delaware, New Hampshire, Montana, and Oregon do not have a state sales tax, although some local jurisdictions do have a sales and use tax in some of these states.

⁴ "Average U.S. Sales Tax Rate Drops -- A Little," Forbes, by William P. Barrett, Feb. 2, 2012.

⁵ Average use tax rate provided by Vertex, Inc. as reported in "Average U.S. Sales Tax Rate Drops -- A Little," Forbes, by William P. Barrett, Feb. 2, 2012.

⁶ Col. Rev. Stat. § 39-21-112(3.5), (2010).

⁷Direct Marketing Association v. Huber, No. 10-CV-01546-REB-CBS (March 30, 2012).

The proposed Consumer Private Report (CPR) proposal for the US retail sales tax is functionally similar to the EU's VAT Information Exchange System (VIES) that exchanges transactional data among tax administrations in the Value Added Tax (VAT). Both CPR and VIES are shared digital databases. Both could operate in real-time.

Importantly, for this discussion, the VIES works, and so should the CPR.

The biggest difference between the VIES and the CPR is that the VIES is designed to capture business-to-business (B2B) data, and the CPR will capture business-to-consumer (B2C) transactions. A second difference is that the VIES is kept by each Member State where the CPR will be a federal database.

The VIES was established in 1992 by Council Regulation.¹ It has two objectives: (1) it allows companies making taxable supplies to determine if their customers hold valid VAT IDs, and (2) it records the value of intra-EU supplies. It is the second attribute of the VIES that allows national VAT administrators to monitor and control tax 'irregularities' in intra-EU trade. This is the aspect of the VIES that the CPR replicates.

Through the exchange of VIES data, tax authorities match cross-border intra-EU supplies (ICS) by registered persons with intra-EU acquisitions (ICA) by taxable persons. VIES data is compiled from bi-monthly sales statements of registered companies.

The VIES however is not state-of-the-art. It is not real-time, and considerable audit resources are still needed to follow the captured data into the granular or transactional detail needed for tax assessment. Proposal have been made to the EU Commission on how to take the "next step" with its VIES (See: DICE -- Digital Invoice Customs Exchange, at: http://papers.ssrn.com/sol3/papers.cfm7abstract id=2314478)

This "next step," DICE, will transmit to the "cloud" a secure (encrypted) record of each commercial transaction. It is a highly cost-effective, secure, and privacy respecting system that operates in real-time. It captures B2B as well as B2C transactions.

It is designed to combat B2B frauds (MTIC and MTEC) as well as B2C sales suppression (Zappers and Phantomware). DICE is operational in the East African Community where Rwanda has taken the lead.² DICE will be demonstrated at the California State Board of Equalization's (BOE) 2014 Sales Suppression and Detection Techniques Symposium April 28-29, 2014 in Pasadena California. This government tax agencies (only) event, sponsored by the BOE could well lead to consideration of a state-of-the-art CPR that would integrate the DICE technology adopted in the EAC into a domestic solution.

² See: Rwanda -- Cutting-Edge VAT Compliance at http://papers.ssrn.com/sol3/papers.cfm?abstract_id-2327521 and VAT -- East African Community: The Tradable Services Problem World-Class Solution http://papers.ssrn.com/sol3/papers.cfm?abstract_id-2310659)