As states continue to grapple with the issue of sales on out of state internet purchases, a few federal congress members have entered the conversation with their own versions of bills that include regulations on who can and can’t be taxed and what constitutes a connection (nexus) between a state and a business or individual.
Recently, I offered you an overview of the Online Sales Simplification Act of 2016 which attempts to focus taxation on the buyer and the seller and employs the tax laws from each of their respective states. Now, I’d like to introduce you to another proposed act that attempts to set limits on sales tax at the federal level.
The “No Regulation Without Representation Act of 2016”
Review the proposed bill and the latest actions here.
This act is short and concise. Borrowing on the political “no taxation without representation” concepts of the 1750’s and 1760’s that lead to the American Revolution, the bill aims to limit a state’s ability to impose tax to those within the state. It limits states to collecting fees and requiring reporting from “persons” with a “physical presence” in the state.
Is This Another Nexus Bill?
As I described in the last nexus update, the bills we typically see introduced by states attempt to make a connection (nexus) between the state and a seller using affiliates. They argue that having affiliates in the state creates a strong enough connection between the state and seller for the state to be able to levy taxes on that seller.
This bill does not attempt to make such a connection. In fact, it attempts to do the opposite (if there is such a thing as an “opposite” in this context). This bill is all about limits.
According to this bill, states would be limited to taxing “persons” (this includes actual individuals, as well as companies/organizations) with a “physical presence in the state”. Requirements for physical presence include:
- Owning, leasing or maintaining real property in the state (such as a retail store, a warehouse, etc)
- Owning or leasing tangible personal property of substance (well defined in the bill) in the state
- Having employees or agents in the state to specifically solicit or service customers in the state
- Maintaining an office with three or more employees in the state
Along with delivery services, credit card processors and marketplace listings, the bill excludes the following from “physical presence”:
- “…entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the State, whether by an Internet0based link or platform, Internet Web site or otherwise…”
- “…Internet advertising services provided by in-State residents which ore not exclusively directed toward, or do not solicit exclusively, in-State customers…”
What This May Mean for Performance Marketers
It’s probably obvious in the fact that I zeroed in on those last two exclusions that I believe that the Performance Marketing industry could benefit from this act. If the federal government limits each state’s ability to impose taxes on out of state businesses, and specifically excludes affiliates from creating nexus, the mass-ejection of affiliates in nexus states could be reversed.
If this bill were to pass, it may still take a while for positive affects to sweep through the industry as states appeal for their rights to collect taxes.
That right to collect is where I, personally, see the biggest hurdle the bill’s sponsors will face. States have identified out of state internet sales as potential revenue sources they feel unfairly cut out of. Having the federal government further define a state’s limits may not seem like much of a solution to their perceived problem. In order to pass, this bill needs congress men and women from multiple states to agree that this bill would benefit their own state.
Join the Internet Sales Tax Reform Conversation
Stay in the loop on the latest state and federal moves on internet sales tax as a Performance Marketing Association member. If you’re already a member, join our special council on Nexus and other tax issues by messaging us at firstname.lastname@example.org for more information.
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