Dec 16, 2015
Special to FORBES.com
Mr. DelBianco is executive director of NetChoice, a trade association of e-commerce and online businesses.
As Congress weighs Internet sales tax proposals, it should look to Europe’s unpleasant experience with the Value Added Tax (VAT) system for guidance on what not to do.
The European Commission (EC) is calling for major reform of its current tax collection system for its 28 member countries because the VAT has proven harmful to retailers and is slowing cross-border purchases. Now the EC is advocating for a tax structure based not on where the buyer is (as is currently the case), but on where the seller is, helping to create what it calls a “Single Digital Market.”
So it’s troubling and downright senseless that as Europe is advocating for major reforms, some here in Congress want to adopt an Internet sales tax policy that will open the door to the exact same problems experienced with the VAT.
Two pieces of legislation adopt the purchaser-based taxation structure of Europe’s current VAT: The Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA).
This makes no sense. European retailers cited the structure of the VAT as one of the top three barriers to growth across national borders, so why would the U.S. want to replicate a failed system?
Europe’s experience with the VAT
In its Single Digital Market strategy, the European Commission wrote: “The complications of having to deal with many different national systems represent a real obstacle for companies trying to trade cross-border both on and offline.”
Specifically, the strategy cites the buyer-based structure of the VAT as the cause of three major challenges:
First, it imposes unrealistic and burdensome costs on small businesses. Europe’s retailers spend an estimated $80 billion annually in compliance costs for filing requirements and audits.
Second, it creates significant confusion. Conflicting requirements from 28 EU member states—including 75 different tax rates—make retailer compliance a real challenge.
Third, it distresses small and mid-size businesses. Small businesses—which account for over 90% of all EU companies—face especially high barriers to entry when dealing with administrative tasks related to processing taxes for various member states.
The EC also cited major concerns around audits. There is a lack of coordination between the 28 different tax administrations auditing the same companies. As the EC says, it imposes “disproportionate administrative burdens on businesses,” and is a significant deterrent for businesses entering the market.
Consequently, cross-border sales are suffering: Since June 2015, only 15% of European consumers purchased from a vendor in another member country. And just 12% of European retailers sold online to consumers in other EU countries, a number which drops to 7% for small and mid-size businesses.
This multi-layered, complex tax system hinders e-commerce, burdens retailers, and discourages cross-border trade. That’s why Europe is seeking a better solution.
Under the reforms advocated, the EC’s Single Digital Market strategy, a retailer would file one return with its own authority for all transactions, and be subject only to its home country’s auditors administration. Taxes remitted to the “home” EU member state would then be distributed to the other EU members. This is a much simpler system.
U.S. proposals ignore Europe’s experience
While Europe is considering a move away from tax administration based on the location of the purchaser, some in Congress want us to embrace the very model that has choked commerce in Europe.
With the MFA and its close cousin, the RTPA, retailers would either have to navigate a web of state and local tax jurisdictions, or pay tens of thousands of dollars to implement software to do the same. Either way, it creates cost, confusion and chaos.
The True Simplification of Taxation coalition estimates mid-market retailers ($5-$50 million in yearly sales) would pay $80-$290,000 in set-up and integration fees and another $57-$260,000 in yearly maintenance and upkeep fees, just to comply with the MFA or the RTPA. And as under the current European system, retailers would face the threat of audit from any one of 46 different states.
Takeaways for a U.S. plan
There is a better approach. Chairman of the House Judiciary Committee, Bob Goodlatte, is working on legislation that takes into account the lessons of Europe–and would establish a system of tax administration based on the location of the seller, not where the customer lives.
There is no need to buy costly software to navigate thousands of tax laws. Audits would be conducted by states where the retailer has a physical presence and can play a role in the political process. The proposal creates a much simpler system that protects businesses and encourages interstate commerce.
Europe is a great place to visit, study and enjoy the local cuisine. But we should not import a failed tax structure that even the Europeans are running from as fast as they can. To do so would be a major mistake.