Applying the marketplace intermediary model for collecting federal sales tax to the federal excise tax would significantly improve compliance. The same would allow the use of a calculator developed by the IRS that would be open and available to marketplaces such as Amazon.com Inc. and eBay Inc.

This, in turn, would significantly increase revenue for projects funded by these revenue streams. Currently, federal excise taxes are difficult to calculate and remit, and many taxpayers may not even be aware of their existence—let alone that they are liable for them.

A Government Accountability Office report released in July highlights a concrete example of this problem: many fishing and archery equipment items sold online by foreign retailers are not subject to federal excise taxes.

When foreign sellers sell goods to the United States, the burden of paying the excise taxes owed on those goods rests with the importer or consumer. For example, a domestic purchaser of a fishing rod from a foreign seller must notify the U.S. state itself and pay the excise tax owed on the equipment.

The problem may not seem that big, but according to GAO, excise taxes on fishing and archery equipment alone will total $206 million per year from 2007 to 2023. These much-needed funds are earmarked for fish and wildlife conservation.

This problem reflects the state sales tax landscape prior to the implementation of marketplace intermediary laws, when states struggled to collect sales taxes on online purchases from out-of-state sellers.

The marketplace intermediary model could also provide a solution for the collection and remittance of federal excise taxes. Because federal excise tax policy is uniform, the IRS could help streamline the calculation, collection, and remittance of excise taxes through marketplaces.

GAO recommendations

To address federal excise tax compliance issues, GAO recommends legislation that would require marketplaces to collect and remit federal excise taxes for importer customers.

This marketplace-intermediary approach shifts responsibility for tax collection from individual foreign sellers or consumers to platforms that facilitate the sale. The model has proven effective at the state level, significantly improving sales and use tax compliance and revenues. Applying this model to federal use taxes could yield similar benefits.

The GAO report suggests that marketplaces should collect and remit federal excise taxes on sport fishing and archery equipment, as well as all other excise-taxable purchases such as telephone services, tires and firearm accessories. This would help provide consistent and predictable funding streams for projects earmarked for those revenues—in the case of hunting and fishing equipment, for example, fish and wildlife conservation.

Such a change would reduce the burden on consumers to navigate the complex self-certification process and help ensure that the excise system is fair and efficient. The current dynamic gives foreign sellers of excisable goods an advantage as they can sell goods at excise-free prices.

This means they are better able to undercut domestic suppliers. Customers are more likely to see this price difference as a reflection of competition in the market rather than as a reflection of the partial tax they have to calculate and pay themselves.

Centralized tax computer

The IRS can take GAO’s recommendations a step further by developing a central tax calculator that online marketplaces can access through an application programming interface.

Such a system could help calculate excise duty automatically based on the item category and selling price at the point of sale. This would streamline the tax collection process for marketplaces and reduce administrative burden, thereby ensuring accurate tax calculation.

In addition, it would provide a safe harbor for marketplaces seeking to comply with the proposed requirement to collect excise taxes – proof that a marketplace is acting in good faith by using the calculator and reporting purchases.

The IRS already offers APIs for various services, from tax ID matching to tax transcript delivery to income verification services. A centralized excise tax calculator would require collaboration between the IRS, marketplaces, and other stakeholders such as third-party software vendors. However, the long-term benefits of improved compliance and improved tax collection would help offset this additional effort.

Linking the calculator to U.S. Customs and Border Protection data could help automate the identification and categorization of imported goods. CBP’s job is to collect excise taxes owed on imports. The long-term goal should be to create an excise tax system where individuals do not need to know their tax liability in order to pay the taxes.

Information campaign

Streamlining the calculation and collection of excise duties at market level is an ambitious, albeit achievable, goal. An education campaign to make consumers aware of these excise duties – and of what the revenue is spent on – would be a crucial step in this direction.

Many consumers may not be aware that they must pay additional federal taxes on certain imported items such as tires, vehicles, fishing and archery equipment, and certainly not that they are responsible for self-reporting.

The IRS could use social media and online information sources to explain the federal excise tax to a wider audience in clear language. Informational posts, videos, and explanations of how federal excise tax revenues are spent could go a long way in encouraging voluntary compliance.

For example, revenue from the excise tax on sporting equipment goes to a wildlife restoration fund and projects ranging from hunter education and safety to land conservation grants. If the IRS makes it clear that these revenue streams are reserved for interest-specific programs that directly benefit those affected by the tax, taxpayers could be motivated to comply.

outlook

To effectively implement the above recommendations, the IRS should initiate a pilot program similar to what it did with Direct File, opening it to select marketplaces to test the functionality and feasibility of a centralized tax calculator.

The increased revenue from the excise tax will support conservation projects, wildlife restoration and educational programs, while also providing a framework for automated tax calculation programs that can be further expanded. These advances could also be made available to state governments in the future to provide them with a robust system to streamline their own tax collection processes.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @[email protected]

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