Willis Commission Report 50th Anniversary Approaches - Multistate Tax Issues Continue

Many of you about the Willis Commission. And for many, it is a mystery - ancient history. And it sure is.  Oddly or unfortunately though, the state and multistate tax issues discussed in this 1,200+ page congressional report and its recommendations mostly read like it could have all been written today.

Volume 1 was released June 15, 1964 (see cover above) and Volume 4 was released September 2, 1965. Here is more, originally posted to Sales Tax Support.com.

In 1964 and 1965, the “Willis Commission” issued a four-volume, 1,200+ page report on multistate problems and possible solutions. The commission was named for its chair, Congressman Edwin Willis (D-LA). It was created as part of P.L. 86-272 (9/14/59), more famously known for providing a rule for when a business that sells tangible personal property will have income tax nexus in a state. In 1962, legislation extended the due date of the report and expanded it beyond income tax.

Much of this report reads like it could have been written today. For example, part of the conclusion reads: “It has been found that the present system of State taxation as it affects interstate commerce works badly for both business and the States.”

A few observations made in the report about sales and use tax follow:

·         At the time, only 38 states and about 2,300 local governments assessed sales tax.

·         Rates, definitions, exemptions and administrative procedures varied among states.

·         It was difficult to get information about the state and local tax base and rates (no Internet and apparently even the commercial tax services could not track it all down).

·         Evasion occurred as many cities had insufficient enforcement resources.

·         States wanted businesses to take a national view of their sales tax obligations, yet States had taken no responsibility for helping to create the type of system needed for “nationwide liabilities.”

·         Congress needed to step in to resolve the issues.

Recommendations for improvement included:

·         Many mail order companies sell unique items that don’t compete with local businesses so don’t bother trying to collect the tax from them. (I don’t think this sounds good today, but the dollars and number of remote sellers in the 1960s was much less than we have today.)

·         Have business customers handle sale and use tax on their own (direct payment approach). (This would be similar to a VAT system and would certainly take the burden off vendors of getting correct exemption certificates from business customers.)

·         Consider a permanent establishment approach to nexus. This “has the effect of requiring collection only in cases where sales are being made in circumstances very similar to those of local companies and where an apparent tax advantage would be most resented.”

·         Devise a uniform tax base with exemptions only possible for food or prescription drugs. If a state wants more, it can “grant refunds to purchasers.”

Since at least 1994 (two years after the Quill physical presence rule), some version of the Marketplace Fairness legislation has been introduced in Congress. Will a version ever be agreed to? Will any state take on Justice Kennedy’s statement in his 2015 concurring opinion in Direct Marketing Association v. Brohl, Executive Director, Colorado Dept. of Revenue (USSC 3/3/15)? He suggested it would be good to revisit Quill, noting it was “questionable even when decided.”

And, of course, the issues are more complex today due to there being more remote vendors, issues of collecting sales tax on services and digital items in some states, and figuring out cloud computing.

What do you think will be different by the 60th anniversary of the Willis Commission report (or perhaps sooner)? Do any of the 1965 suggestions sound good today? Please submit your comments below.

Tax policies for multijurisdictional income

On March 1, the SJSU MST Program, Santa Clara Valley TEI chapter and the Tax Policy Committee of the California Bar Taxation Section held their 3rd annual Tax Policy Conference. The theme - Tax Policies for Multijurisdictional Income.  This is a hot topic at both the international and national levels. Presenter materials are available here - but they can't replace the excellent presentations and ideas that were presented and discussed.

A few observations from the day's presentations:

• Despite occasional calls for formula apportionment at the international level, it likely would not work. It would be more difficult to get all countries to agree on this approach than it has been for the U.S. states. The diversity of economies and needs of developed versus even emerging countries are too great to think that a consensus approach can be reached. Transfer pricing will likely remain the standard, although countries may tighten the rules.
• There will be challenges in creating a territorial system in the U.S. In addition to politics of reaching a consensus, there is the issue of revenue neutrality and whether it is wise to employ a system different from other industrialized countries that tend to use a dividend exemption approach.
• Focus of governments will continue to be on taxing intangibles.
• The Mayo decision of the US Supreme Court likely gives the IRS greater authority on how it writes transfer pricing rules.
• The OECD BEPS (Base Erosion and Profit Shifting) report issued earlier this year should be reviewed.
• Many factors play a role in how multistate income is apportioned among states - nexus, sourcing, throwback, apportionment factors, and reporting system (combined/unitary or separate).
• Given the numerous complexities in apportioning multistate income in some economically or accounting-wise justifiable manner and the relatively low amount of tax it generates, perhaps states should just repeal their corporate income taxes. 

And economist Jon Haveman helped provide a broader picture of the economy in which tax reform would take place, should any significant changes actually occur. He noted that sequestration will hurt the economy for some time and that failure to adequately invest in infrastructure will hurt our economy for years.  That is all important to consider because reasons why Congress is exploring a more to a territorial tax system and a lower corporate tax rate is to improve competitiveness of US firms and to help the economy. But overlooking other big influences on the economy might limit the possible gains from reform.

What do you think?

Information on other conferences of the SJSU MST Program - http://www.tax-institute.com.