The Marketplace Fairness Act: The Taxation of Internet and Other Remote Sales

May 22, 2013 11:19 AM

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act (“Act”), which would dramatically change the use tax collection requirements for the nearly all remote sellers and, most notably, internet sellers.  If enacted into law, the Act would require remote sellers to collect and remit use tax from their customers in states where those sellers currently have no such legal obligation.  It is estimated that this legislation could help states collect as much as $23 billion in use taxes, largely from internet sales, that they are currently unable to efficiently collect.  The U.S. House bill has broad bi-partisan support, but still faces stiff opposition. 

Current State of the Law

In 1967, the U.S. Supreme Court ruled in National Bellas Hess v. Illinois that states could not compel retailers without a physical presence in a state to collect use tax from its customers in that state.  The Court’s holding was based on the U.S. Constitution’s Commerce Clause, which gives the federal government the authority to regulate interstate commerce.  In 1992, the Court reaffirmed this decision in Quill Corp. v. North Dakota.  In its opinion, the Court found that the commerce clause gives Congress the authority to overrule these decisions through legislation. 

How the Marketplace Fairness Act Works

Under the Act, an internet or other out-of-state retailer selling into a state where it has no physical presence could be required to collect and remit use tax from its customers.  In order to enforce this obligation, a state must either already be a party to the Streamlined Sales Tax Agreement, or must simplify its sales and use tax laws to conform to the provisions of the Act.  Simplification measures include:

  • Notifying retailers in advance of any rate changes in the state;
  • Designating a single state organization to handle sales tax registrations, flings, and audits;
  • Establishing a uniform sales tax base for use throughout the state;
  • Using destination sourcing to determine sales tax rates for out of state purchases; and
  • Providing software and/or services for managing sales tax compliance, and hold retailers harmless for any errors resulting from a reliance on state provided systems and data.

Most states are already in compliance with the first four of these provisions, and some that aren’t (such as Colorado, where a number of local jurisdictions administer their own sales and use taxes) are drafting legislation to bring their laws into compliance.  In addition, the Act includes a carve-out for small businesses with fewer than $1 million in annual sales.

Policy Rationale for the Act

Proponents of the Act cite a couple of reasons for the Act’s necessity.  First, the Act is intended to “level the playing field” between remote sellers and brick and mortar retailers, who are required to collect sales tax on all in-person purchases, as well as purchases made through their online alter-egos.  Second, the Act is intended to improve states’ ability to efficiently collect from retailers taxes it is currently unable to efficiently collect from individual consumers.  Big box retailers and state governments are supporting the legislation, as is, a long-time foe of the legislation who is now looking to move toward a same-day delivery model, which will necessarily require distribution centers in far more states than it currently operates.

It’s important to note that the Act does not create any new taxes.  Contrary to popular opinion, purchases of goods from remote sellers are already subject to tax in all states that impose a use tax.  While individuals have become accustomed to purchasing goods from online retailers “tax free,” the reality is that those purchases are subject to a use tax in the state where the purchaser puts the goods into use.  For administrative reasons, primarily associated with the cost of trying to enforce and collect the tax, states have been either unable or unwilling to collect the use tax from individual purchasers.  If enacted, the burden of collection and remittance shifts to the retailer wherever it is located and the states dramatically improve tax collections on sales of products currently not being taxed which are being shipped into their borders. 

How Can True Partners Help?

If your company purchases goods from online retailers, the Act should actually lower certain administrative costs, as it will reduce the amount of effort spent reviewing invoices for use tax accruals, and eliminate much of the human error that could lead to large audit liabilities stemming from unremitted use tax.  If your company is making retail sales over the internet and you are concerned that the Act could create a collection and remittance obligation, True Partners’ experts can assist in determining where and on what sales your obligation lies.  Our sales and use tax experts have a wealth of experience in helping our clients navigate through the myriad rules on the taxability of their sales in nearly 10,000 local jurisdictions nationwide while maximizing the benefits available to them or their customers in many of these jurisdictions.  Our compliance outsourcing group can also help you reduce the administrative burden resulting from increased filing requirements.  To help you prepare for this upcoming legislation, contact one of our experts today.

Donald Bast

Bruce Davis

Tracey Sellers

Jana Grossenbacher

William Seitz

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