Taxing On-Line Sales – the Marketplace Fairness Act
On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act (MFA) with bipartisan support by a vote of 69-27. The MFA is viewed by its proponents as a measure to level the playing field between on-line sellers, like Amazon, and brick-and-mortar retailers. The MFA now moves to the U.S. House of Representatives where it will likely face stronger opposition as both House Speaker John Boehner and House Judiciary Committee Chairman Bob Goodlatte appear to be opposed to the bill.
Under current law, states may not compel an out-of-state seller to collect sales of use tax when selling goods to a resident of that state unless the seller has “nexus” with that state. In National Bellas Hess v. Illinois Department of Revenue, 386 U.S. 753 (1967) and Quill Corp. v. Heitkamp, 504 U.S. 298 (1992), the U.S. Supreme Court ruled that the Commerce Clause requires that a remote seller to have a physical presence in the state for nexus to exist. The physical presence standard may generally be satisfied if the remote seller owns property in the state, has employees in state, or provides services in state. For this reason, even when a consumer purchases goods on-line from brick-and-mortar stores (e.g., Barnes & Noble), use tax is assessed by the seller.
It is important to understand that, when the retailer does not tax on the transaction, the purchaser has the obligation to self-assess use tax and pay that amount to their state. In many cases, individual purchasers ignore this obligation and the tax goes unpaid. Due to the small size of the majority of these purchases, the states do not enforce the use tax collection laws.
The proposed legislation grants states the option to require the collection of sales or use taxes by remote sellers at the time of the transaction, rather than rely on the purchasers to self-assess use taxes to their home states. The requirement to collect tax only applies to sellers that have gross annual receipts derived from remote sales within the United States for the preceding calendar year of more than $1 million. The tax rate would be based on the shipping address specified in the transaction.
The requirement that the tax be based on the shipping address is viewed as a significant burden on small business by opponents of the proposed legislation. As there are nearly 10,000 taxing districts in the United States, each with varied tax rates, exemptions, and tax holidays, it may be difficult for small remote sellers to accurately collect and remit taxes. In contrast, brick-and-mortar retailers collect sales tax at the applicable rate at the jurisdiction in which they are located.
In order to ease the burden on small retailers, the Marketplace Fairness Act requires that states simplify their sales tax laws and make multi-state sales tax collection easier. Specifically, states seeking authority to compel remote sellers to collect tax have two options for simplifying their sales tax laws. First, a state can adopt the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last eleven years and which twenty-four states have already voluntarily adopted. Any state which is in compliance with the SSUTA and has achieved Full Member status as a SSUTA implementing state will have collection authority.
The second option is for a state to satisfy five simplification mandates included in the bill. States that choose this option must agree to (1) notify retailers in advance of any rate changes within the state, (2) designate a single state organization to handle sales tax registrations, filings, and audits, (3) establish a uniform sales tax base for use throughout the state, (4) use destination sourcing to determine sales tax rates for out-of-state purchases, and (5) provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.
Large brick-and-mortar retailers, including notable giant retailers such as Wal-Mart, Best Buy, JC Penny, Home Depot, and Lowes strongly support the MFA, as well does many trade organizations. Even on-line giants such as Amazon and Buy.com support the legislation. Based on the potential opposition to the proposed legislation in the House, the future of the bill is unclear. However, with the support that the proposed legislation now has, it is more likely than ever that on-line transactions will be fully taxed in the coming years.
