THE UTAH TAXPAYER a Publication of the Utah Taxpayers Association

12 May 2012 Volume 37 Issue 5 THE UTAH TAXPAYER A Publication of the Utah Taxpayers Association Closing a Loophole in Utah Sales Tax Law MAY 2012 Why the Colorado and Illinois Decisions Volume 37 Don’t Apply to HB 384 My Corner: Finding Since the Supreme Court’s 1992 opinion in Quill v. North Dakota, states and Consensus to Fix the Congress have struggled to create a structure to capture sales taxes from in- state customers legally owed on transactions where the seller is located in out- Restaurant Tax Page 2 of-state. Under Quill, states can only compel the seller to collect sales tax if the state has “nexus,” or a physical presence in its state. Otherwise, the Supreme 34th Utah Taxes Now Court ruled, compelling the out-of-state (or remote) retailer to collect the sales Conference Tentative Agenda tax interferes with interstate commerce, which runs afoul of the Commerce Clause. Page 3 While the Quill decision focused on catalog sales, the issue has become much A Penalty or a Tax? An broader as online shopping has become more common. As remote selling, Explanation of “Obamacare” particularly through online companies like Amazon, has grown, states have Page 4 looked at several structures to collect the taxes on these transactions. The most widespread effort to address the Quill decision has been the Streamlined Sales Tax project. Utah has been a founding member of the Growth in Municipal Streamlined Sales Tax project for nearly 12 years. We Broadband Struggles to Reach have worked tirelessly to address the very issues that Users Page 5 the courts have ruled on in a fair and equitable solution. Some 26 states are now members of the Taxpayers Foundation Event Governing Board and have adopted uniform rules, with John Stossel a Success definitions, procedures and simplification tools. All Page 6 that is left is for Congress to pass legislation allowing the simplification to occur. Fortunately, Congress is considering 3 bills that will Register for the Teed Off on enable states to more easily collect tax that is due and Taxes Golf Tournament to relieve the burdens being place on business to Page 6 Representative comply with the intricate and costly tax codes in an Wayne Harper efficient and much less costly manner. While not perfect, these bills go a long way to address the Supreme Court’s concerns expressed in Quill. Among other things, they allow Association Staff for tax simplification and eliminate the inequitable tax advantage that remote retailers now enjoy over brick and mortar retailers. Howard Stephenson President A second structure designed to collect taxes on transactions with remote Royce Van Tassell Vice President sellers is the “use tax.” Utah and most states require taxpayers to pay “Use Chase Everton Research Analyst Tax” on transactions where the good is used in the state, but no sales tax was Sophie Mickelsen Executive Assistant paid. That has been the law in Utah for many decades. Taxpayers should pay use tax when they file their income tax return, though very few do and most Executive Committee taxpayer do not even understand what it is. In the past several years, states like Colorado, Illinois, New York and John Ward Chairman California have passed a third structure known as affiliate nexus bills, or James Hewlett Vice Chair “Amazon taxes.” Amazon taxes compel remote sellers to collect sales tax when Kent Stanger Secretary the seller has an affiliate or some other business relationship in the state. Mike Edmonds Treasurer Unsurprisingly, some remote sellers have challenged these laws in court, Morris Jackson Legislative Chair Margo Provost Immediate Past Chair arguing that they too violate the Commerce Clause. H. Val Hafen At Large Recently a federal court in Colorado and an Illinois state court struck down Max Miller At Large their respective Amazon Taxes. In these decisions, the courts argued, states www.utahtaxpayers.org 123 May 2012 Volume 37 Issue 5 may collect tax on transactions in their state, but may not force parent company or common ownership. Second, there must be a a company to collect the sales tax, just because they sell in that related company with a physical presence in Utah. Third, similar state via an affiliate or some other business relationship. The goods must be sold by the related company and by the dot.com courts ruled that the Colorado and Illinois laws violated the company. Fourth, the goods must be used or consumed in Utah. Commerce Clause because these acts imposed a "differential While HB 384 does not solve all of the issues inherent in treatment of in-state and out-of-state economic interests that collecting sales taxes from remote sellers, it does close a loophole benefits the former and burdens the latter." in Utah law. No longer can a nominally remote seller claim not Utah has not adopted Amazon Tax, but has chosen a different to have Utah nexus, even though a sister company with Utah route, one that is more refined and focused. Utah's HB 384 nexus sells the same goods in Utah. Obviously the courts have (passed in the 2012 Legislative Session) focused on businesses not ruled on HB 384, but the bill had virtually no opposition and transactions that are already occurring in the state and during the Legislative Session. Hopefully this bill will point one which are taxable and the tax should be collected at the time of way to close the tax gap between remote and brick and mortar the sale. To be required to collect and remit the sales and use retailers. After all, government policy shouldn’t pick winners tax the following provisions must be met. First, there must be a and losers in the marketplace. My Corner: Finding Consensus to Fix the Restaurant Tax This article appeared in the February food) will generate the approximately $34.1 million the current 2011 issue of The Utah Taxpayer. Since restaurant tax should create in FY 2012. Importantly, our proposal then, your Taxpayers Association has solution means the counties’ learned that many county commissioners “restaurant” tax revenue will Taking food out of the and council members did not vote on the continue to grow as the value of regular sales tax base following proposed solution. Your goods and services grows. violated the good tax policy Taxpayers Association is currently in How the counties divide that of a broad base and a low litigation with Utah’s counties and $34.1 million matters little to us. rate. It’s time to fix that thought it was important to remind Or should I say, it used to matter Association President readers of this proposed solution. little to us. During the 2010 General Session, it became clear that a Howard Stephenson Sometimes, consensus is the best solution to the restaurant tax problem requires the counties to be way to solve a problem. And in the active participants in the negotiations. So this year we are case of your Taxpayers Association’s efforts to fix the restaurant addressing the distribution question as well. tax, I think we just might have consensus. As we have evaluated the distribution question, we revisited the The Taxpayers Association has worked for years to fix the current distribution method. That method is very straightforward: restaurant tax. As long time each county keeps the restaurant taxes collected in their county. readers of The Utah Taxpayer The Counties have outlined two Needless to say, any change altering how much each county will recall, the restaurant tax requirements any legislative receives fails the Counties’ second requirement. Initially, we has two problems. First, it proposal on the restaurant tax toyed with measuring the average annual percentage of discriminates against the must meet. First, the proposal restaurant tax revenues that each county received. Calculating restaurant industry. Why must maintain the amount of that percentage isn’t difficult, so why not just assign those should people who eat at funding the restaurant tax has percentages in statute? restaurants pay this tax, provided. Second, the proposal The problem with that method is that Millard and Piute counties while people who eat at has to create a distribution don’t impose the tax today, but may decide to later. Imposing a convenience stores or grocery method that leaves the counties fixed set of percentages would mean those counties would get no stores don’t? Second, it who impose the restaurant tax revenue, even if they impose the tax. Clearly, that solution can’t applies a very high rate (a unharmed. work. full one percent!) on a very As we further considered the issue, we realized that the Tax narrow base (restaurant sales). Good tax policy demands the Commission can use the distribution method in place today, lowest possible rate applied to the broadest possible base. whether or not the current restaurant tax exists. Knowing how Our legislative efforts to fix these problems have repeatedly much restaurant sales occur in each county, the Tax Commission been stymied, because none of our proposed solutions sufficiently can use the same formula to distribute the $34.1 million to the addressed the concerns of the Utah Association of Counties. The counties. First, the Tax Commission calculates what proportion of Counties have outlined two requirements any legislative proposal the total restaurant sales occur in each county. Second, they on the restaurant tax must meet. First, the proposal must maintain multiply each of those shares by $34.1 million in “restaurant” the amount of funding the restaurant tax has provided. Second, taxes collected statewide. That product must give each county the the proposal has to create a distribution method that leaves the same amount of revenue as it would receive with the current counties who impose the restaurant tax unharmed.

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