Proposed “Junk Fee” Rule Would Create Inadvertent Tax Headaches

Sellers in some states could soon be simultaneously required and prohibited from publishing sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
-inclusive prices, and they might be unable to list any prices at all before ascertaining a potential purchaser’s address. This is clearly not an outcome anyone intends, and it should be easy to fix, but it’s a likely consequence of one particular provision of the Biden administration’s proposal to ban so-called “junk fees.”

Addressing the problem would have little-to-no impact on the broader aim of the proposed regulations, which are intended to crack down on hidden and deceptive fees, add-ons, and other charges that initially obscure the true price of a purchase. Some see the broader assault on these add-on fees as a necessary step to counter deceptive practices, while others fear they would limit consumer choice. The state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
issue, by contrast, has nothing to do with the broader issue, and everything to do with the entirely fixable way one specific element of the proposed Rule was drafted.

Under the Federal Trade Commission’s (FTC) proposed Rule, sellers would be required to display an all-in price that includes all charges except two: (1) shipping charges, and (2) government charges on consumers. The reason for both exclusions is the same: the seller genuinely cannot know the amount to display until obtaining more information from the consumer. Shipping charges will legitimately vary based on where the consumer lives and how quickly they want their parcel to arrive. Taxes and fees, moreover, also vary based on information provided by the consumer. A seller cannot calculate sales tax until they know which state—and sometimes local—sales tax to apply.

So far, so good. The FTC recognized the issue and sought to address it by excluding these government charges. Unfortunately, the definition is too narrow, running headlong into some states’ sales taxes despite the FTC’s effort to exclude them. Under the proposed rule:

“Government Charges” means all fees or charges imposed on consumers by a Federal, State, or local government agency, unit, or department. This definition covers only fees or charges imposed by the government on consumers and does not encompass fees or charges that the government imposes on a business and that the business chooses to pass on to consumers.

Here’s the problem: in some states, the legal incidence of the sales tax is on the business, which then either can or must pass that cost along to the consumer. Take New Mexico, for example. The state imposes what it calls the Gross Receipts TaxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding.
, but it’s actually a hybrid sales-and-gross receipts tax that functions as the state’s sales tax. Whereas most states’ sales taxes are legally imposed on the purchaser, New Mexico’s legal incidence is on the seller. (The incidence is, however, on the consumer for the use tax, for New Mexico-based purchasers from out-of-state sellers.) This is a distinction without a difference to the average consumer, who still sees the tax on their receipt. But it also means that New Mexico’s sales tax does not qualify as a “government charge” under the FTC’s definition. A New Mexico-based company would be legally required to include the New Mexico sales tax in their all-in published price if selling to an in-state consumer—but, for online transactions, couldn’t know that the consumer was in-state before securing an address.

Similar problems could arise in Alabama, Arizona, Hawaii, and possibly California. And certain excise or gross receipts taxes could be implicated too, including Maryland’s digital advertising tax.

California is particularly thorny. State courts have ruled that the state’s sales tax is legally imposed on the seller, while the U.S. Supreme Court has held that the legal incidence of California’s sales tax is on the consumer. The state squares this circle by insisting that the tax is legally imposed on the seller—except for certain federal purposes. This might mean that the federal government would regard California’s sales tax as a government charge, and thus excludable from advertised prices, but that is not a given.

And there’s a further wrinkle: many states prohibit including the sales tax in the listed price. Alabama, for instance, prohibits it, meaning that an Alabama-based company might be required by federal regulation to include the Alabama sales tax in the listed price, while simultaneously forbidden to do so by state law. California, meanwhile, allows including the sales tax in the listed price, but only if they post signage reading “All Prices Include Sales Tax.” Meanwhile, for certain transactions the state requires price displays that excludes all taxes and government-imposed fees, creating a quandary. The federal government might require California sales tax to be included in the initial pre-tax price, while California might ordinarily allow that if advertised as such, but also requires a price display that excludes California sales tax.

All of this is a lot to ask of retailers, and particularly of small remote sellers, even when the requirements aren’t directly in conflict.

Fortunately, there’s a solution here, and it’s to take a page from California. The FTC simply needs to define government charges somewhat more broadly—at least to include taxes and fees legally imposed on businesses which they are allowed, or required, to pass along to consumers.

Regulators presumably sought a narrow definition so that sellers couldn’t speculatively break out all the government taxes and fees they pay into hidden add-ons (e.g., “property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
remittance fee,” “corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

offset”). But by restricting it to taxes where there’s clear authority to pass along the cost to consumers post-list price, the federal government could accomplish its purpose without creating massive headaches for those operating under the sales taxes of certain states.

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