Marketplace Fairness Act

CCH Tax Briefing

May 7, 2013 Special Report Senate Approves Internet Sales Tax: Highlights Authorization of Tax Measure Headed to House Collection on Remote Sales he U.S. Senate has overwhelmingly, states not collecting tax on remote sales. The Small Seller Exception and with strong bipartisan support, National Conference of State Legislators es- Simplification Requirements passed the Marketplace Fairness Act timates that states collectively lost $23 bil- Tof 2013 (the Act) by a vote of 69-27. The lion in revenue from uncollected sales tax in Relief from Liability bill would allow a state to require certain re- 2012. In addition, software has reduced tax Sourcing Rules mote sellers to collect sales and use tax on compliance burdens. sales made to customers in the state. States Limitations that are members of the Streamlined Sales The Act is the culmination of more than and Use Tax Agreement (SST) would auto- 10 years of legislative efforts by state and matically be granted this authority. States local government officials and traditional that are not SST members would be re- retailers. In addition to Democratic and quired to implement simplification require- Republican members of Congress, the Act’s INSIDE ments. The bill provides an exception for proponents include large brick-and-mortar BACKGROUND...... 1 businesses with annual remote sales of $1 retailers, numerous retail trade associations, million or less. various labor unions, and state governors AUTHORITY TO REQUIRE from both parties. For years, Amazon.com TAX COLLECTION...... 2 COMMENT. The Act now moves to fought states’ efforts to require it to collect the House of Representatives, where its sales tax, but it now supports the legislation. MANDATORY SIMPLIFICATION fate remains uncertain. It will likely Opponents include conservative groups, REQUIREMENTS...... 2 be referred to the Judiciary Committee some Republican lawmakers who view it for consideration. as a tax increase, and lawmakers from states LIMITATIONS...... 3 that do not impose a sales tax. eBay has said that it is not opposed to tax collection BACKGROUND requirements in principal, but it contends that the $1 million threshold for the small Under the U.S. Supreme Court’s decision business exception is too low. in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a state cannot compel a seller Supporters say the issue is fairness. Brick- to collect the state’s tax unless the seller has a and-mortar retailers have long argued that physical presence in the state. Although the the physical presence restriction provides Court upheld the physical presence require- Internet sellers with an unfair advantage. ment, it also stated that “the underlying is- By not collecting sales tax, an online re- sue is not only one that Congress may be tailer seller can, in effect, sell an item at a better qualified to resolve, but also one that lower price than a store. Retailers who oper- Congress has the ultimate power to resolve.” ate stores have increasingly complained of “showrooming” by customers, who come to In the years since the Quill decision, tech- a store to browse and then order the same nological changes and the rapid growth of merchandise online where they will not be e-commerce have dramatically changed charged tax. the retail landscape. In the Quill opinion, the Court cited an estimate of $3.2 billion COMMENT. The National Retail Federa- in lost state revenue in 1992, as a result of tion applauded the Senate’s passage of the 2013 Legislation Update 2

Act, saying it will level the playing field the state’s intent to exercise authority under MANDATORY and safeguard states’ rights. the Act, but no earlier than the first day of SIMPLIFICATION the calendar quarter that is at least 180 days State and local government officials, con- after the enactment of the Act. Non-SST REQUIREMENTS cerned about diminishing sales tax revenue, states would receive this authority beginning have also been strong backers. no earlier than the first day of the calendar A state that is not an SST member would quarter that is at least six months after the be required to enact legislation specifying IMPACT. In a letter to the Senate urging date that the state enacts legislation to exer- the tax or taxes to which the authority and passage of the Act, the National Governors cise the authority and implements the Act’s minimum simplification requirements ap- Association noted that the tax disparity mandatory simplification requirements. ply, and the products and services otherwise between online businesses is “shuttering subject to those taxes to which the authority stores and undermining state budgets.” Small Seller Exception. A state would not does not apply. be allowed to require tax collection by a seller Opponents of the Act say it would kill jobs that had gross annual receipts in total remote Single entity administration. A state and place an unreasonable compliance bur- sales in the preceding year of $1 million or would be required to designate: den on small online businesses forced to less. For purposes of determining whether the deal with more bureaucracy and collect tax small seller exception is met, the sales of all a single entity responsible for all state in approximately 9,600 jurisdictions. persons related within the meanings of Inter- and local sales and use tax administra- nal Revenue Code (IRC) Sec. 267(b) and (c) tion, return processing, and audits for COMMENT. NetChoice, a trade as- or IRC Sec. 707(b)(1) would be aggregated. remote sales sourced to the state; sociation of online businesses and con- Persons with one or more ownership relation- a single audit of a remote seller for all sumers, says the Act fails to require “true ships would be aggregated if such relation- state and local taxing jurisdictions with- simplification of incredibly complex ships were designed with a principal purpose in the state; and sales tax regimes.” of avoiding the application of the Act. a single sales and use tax return to be used by remote sellers to be filed with the single Conservative groups also contend the Act “Remote sale” would mean a sale into a entity responsible for tax administration. allows overreaching by state governments. state in which the seller would not be le- gally required to pay, collect, or remit state Remote sellers would not be required to COMMENT. Heritage Action has called or local sales and use taxes unless provided file returns more frequently than non-re- the Act a “dangerous extension of state by this legislation. mote sellers. power” and will include it as a “key vote” on its legislative scorecard.

COMMENT. Americans for Tax Reform Streamlined Sales Tax State Members says the Act will harm small businesses and open the door for states to reach A full member state is a state that is in compliance with the Streamlined Sales and Use Tax across the border for other taxes, the start Agreement through its laws, rules, regulations, and policies. Current members include: of a “dark path towards unaccountable Arkansas North Carolina taxation,” where businesses will be sub- Georgia North Dakota ject to audits and tax enforcement in Indiana Oklahoma jurisdictions where they have no legisla- Iowa Rhode Island tive representation. Kansas South Dakota Kentucky Utah AUTHORITY TO REQUIRE Michigan Vermont Minnesota Washington TAX COLLECTION Nebraska West Virginia Nevada Wisconsin The Act would allow a state to require all re- New Jersey Wyoming mote sellers that do not qualify for the small seller exemption to collect tax on all taxable An associate state is a state that has achieved substantial compliance with the terms of sales sourced to the state. SST member states the Agreement taken as a whole, but not necessarily each provision, measured qualita- would be granted this authority beginning tively. Ohio and Tennessee are associate members. 180 days after the state publishes notice of

Uniform Tax Base. A state would be required to remote sellers and CSPs if the liability cannot be obtained, the sale is sourced to to provide a uniform tax base among the state is the result of incorrect information or the address of the seller. and local taxing jurisdictions within the state. software provided by the state; and to remote sellers and CSPs for collecting Taxability Information and Software. A tax at the immediately preceding effec- LIMITATIONS state would have to provide a rate and bound- tive rate during the 90-day notice period ary database and information indicating the if the required notice is not provided. The Act would not be construed as: taxability of products and services along with any product and service exemptions. Ninety Sourcing of Interstate Sales. SST mem- subjecting a seller or other person to days notice of state and local rate changes ber states would source remote sale accord- franchise, income, occupation, or any would be required. The state would also be ing to the SST’s sourcing provisions. States types of taxes other than sales and use required to provide remote sellers with free that are not SST members would be re- taxes, affecting the application of such software that calculates sales and use taxes quired to adopt the interstate sourcing rules taxes, or enlarging or reducing state au- due on each transaction and files returns. specified in the Act. The rules, which are thority to impose such taxes; similar to the SST’s general sourcing rules, creating any nexus between a person and Relief from liability. A state would be re- provide that remote sales are sourced to the a state or locality; quired to provide relief from liability to the location where the item sold is received by encouraging a state to impose sales and use state or local jurisdictions for the incorrect the purchaser, based on the location indi- taxes on products or services that were not collection, remittance, or noncollection of cated by delivery instructions provided by taxed prior to the enactment of the Act; tax, including penalties and interest: the purchaser. If no delivery information affecting a state’s authority over licens- is specified, the sale is sourced to the cus- ing or interstate commerce; or to remote sellers, if the liability is the re- tomer’s address that is either known to the preempting or limiting any power exer- sult of an error or omission by a certified seller, or obtained by the seller during the cised by a state or local jurisdiction. software provider (CSP); consummation of the transaction, including to CSPs, if the liability is the result of the address of the customer’s payment in- The provisions of the Act would apply only misleading or inaccurate information strument if no other address is available. If to remote sales and would not affect intra- provided by a remote seller; the address is unknown and a billing address state sales or sourcing rules.

CCH Tax Briefing