How Would A Consumer Private Reporting System (CPR) Affect Ecommerce?
Sales tax has become so complex for everyone involved that it needs a little “CPR”! Or does it? For sales tax, a Consumer Private Reporting System (CPR) most likely wouldn’t “breathe life” into ecommerce. So what do ecommerce retailers need to know about CPR?
The CPR system is essentially a database of consumer purchases. It’s purpose would be to focus more on use tax laws that are already established, instead of changing current sales tax procedures as a way to address uncollected taxes from online sales. This proposal came about as part of an attempt by the House of Representatives to seek alternatives to the MFA, which has been stalled in the House since 2013. This type of system does have some merits and of course, some flaws. Our focus here, however, is on how this sort of plan would affect ecommerce if it were implemented instead of MFA.
The theory is based on the idea that both sales and use taxes are excise taxes, which are taxes on the right to do something. Sales tax is on the right to sell a good or service, while use tax is on the right to consume a good or service within a state if the sales tax has not already been collected. Most taxes are incurred when a “taxable event” has occurred. We won’t get into the codified definition of that event, but the gist of the argument presented during testimony is that with regards to sales tax the taxable event is NOT the sale of the good or service, but WHEN it is actually consumed. Businesses are essentially doing the consumer a favor when collecting sales tax upfront because the ultimate responsibility, supposedly, falls on the consumer.
States already have in place a myriad of consumer use tax rules that are unable to be enforced because they don’t have access to a consumer’s purchase history, which is what this proposal focuses on. The proposal is a Consumer Private Reporting System (CPR).
These are the basics of how a Consumer Private Reporting System (CPR) would function:
- The Federal government would create a database that remote sellers would report in to. This would be done either manually or via approved software that helps a remote seller determine what is taxable.
- The seller and/or the approved software would then create a 1099-type document that is sent to the consumer on either a quarterly or yearly basis.
- The consumer then has the appropriate information to file a use tax return reporting the amount of tax they owe.
Because each state will have access to the federal database they will also know which residents are required to file. Of course a consumer would have the right to reveal the specifics of purchases if they disagree with the taxability of the items. Otherwise, a state would not have any details; just the amounts would be available.
This approach only serves to increase reporting burdens on businesses while also shifting compliance to individuals. The presenter of this framework noted, “The burden is really placed on the software provider to make sure their software properly accounts for taxability of the sales, and properly reports that information without private consumer information, to the states.”
Without addressing how states define the taxability of items, but rather simply shifting the burden—whether to individuals or software companies—CPR does not solve the primary issue it was designed for.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.