“From what I’m told, there are nearly 10,000 state, local and municipal tax codes nationwide. And while complying with so many codes might not be a big deal for large online retailers, it’s a huge burden on the little guys.”
— Senate Republican leader Mitch McConnell, speaking against a bill that would require online merchants to collect sales taxes, April 23, 2013
During last week’s debate over a bill that supporters call the Marketplace Fairness Act — which appears headed for Senate passage in May with bipartisan support — a colleague spotted this “nearly 10,000” figure and wondered about its accuracy. It certainly seems like a large number.
The proposed law would require online sellers with annual revenues of about $1 million to collect the relevant sales taxes that would have been due if the buyers had purchased the items in their home states. Currently, no sales tax is expected to be collected if the seller does not have a physical presence in the state, such as a warehouse. Instead, buyers are supposed to pay such sales taxes when they file their income taxes, but compliance is poor, so states claim they are losing billions of dollars in unpaid state taxes.
McConnell’s office said he got the figure from a report by the Tax Foundation, which said that “several private firms maintain databases of the sales tax rates in the 9,600 local jurisdictions in the United States that levy them.”
Joseph D. Henchman, vice president of legal and state projects at the Tax Foundation, said the actual figure is 9,646, as of July 2011. He said that Vertex, Inc., a sales tax software provider, calculated the figure at the Tax Foundation’s request.
Diane L. Yetter, founder of the Chicago-based Sales Tax Institute, said the numbers vary so much because of differences in the sophistication of the software. For instance, she said, Denver has several special-purpose tax districts, such as for the stadium or the convention center. Some software companies count each district as a separate tax jurisdiction and others lump together all of the districts as one entity.
The numbers add up quickly because all but five states have sales taxes, and these then can be layered with county, city and/or district sales taxes. In 2012, Vertex says, 259 tax jurisdictions either increased or decreased their rates, while 167 new tax districts were created.
“The number is not easily verifiable,” she said, noting the wide ranges of estimates. “But 9,600 is probably a good average.” She said the figure refers to the number of “tax authorities that have the right and the ability to impose a tax with a rate.”
Whether the crazy-quilt of tax jurisdictions is “a burden” is open to interpretation. David French, senior vice president of government relations at the National Retail Federation, which is pushing hard for a new law, said that “it is true that there are roughly 9,600 taxing jurisdictions, but the Marketplace Fairness Act contains several provisions to simplify compliance for remote sellers.”
As an example, he said the bill would require only one return per state, so sellers would only have to file a maximum of 47 returns (45 states with a sales tax, plus D.C. and Puerto Rico). He said the bill also includes a requirement for a uniform tax base within each state, which is already underway as a result of an effort known as the Streamlined Sales and Use Tax Agreement.
We obviously take no position on the legislation, but the Congressional Research Service produced an interesting report that lays out some of the issues for readers who want to know more.
The Pinocchio Test
McConnell’s figure stands up to scrutiny, falling right in the center of the various estimates of tax jurisdictions in the United States. It may be debatable whether the figure is especially relevant, especially if the bill would indeed simplify the filing of state taxes, but McConnell earns a prized Geppetto Checkmark.
Check out our candidate Pinocchio Tracker