Federal Internet Sales Tax Proposal Making a Comeback?

The legislation would allow states to require online and catalog retailers to collect state and local sales taxes.
(Published Dec 6, 2012)

A bipartisan group of U.S. senators last week offered a motion to amend a defense appropriations authorization (S. 3254) to include the provisions of the Marketplace Fairness Act (S. 1832), legislation that would allow states to enforce the collection of state and local sales taxes on Internet and catalog sales. The motion was offered by Sens. Richard Durbin (D-Ill.), Michael Enzi (R-Wyo.), and Lamar Alexander (R-Tenn.).

The amendment was ultimately not added to the defense authorization bill due to concerns that the issue is not germane to the bill, but the issue has been gaining bipartisan momentum while opposition from some online retailers has been waning.

The original Marketplace Fairness Act was introduced by Sens. Enzi, Durbin, and Alexander. Sens. Tim Johnson (D-S.D.), John Boozman (R-Ark.), Jack Reed (D-R.I.), Roy Blunt (R-Mo.), Sheldon Whitehouse (D-R.I.), Bob Corker (R-Tenn.) and Mark Pryor (D-Ark.) are also co-sponsors of the legislation.

Since the original bill was introduced, a number of senators have added their names to the bill, including Sens. Amy Klobuchar (D-Minn.) and Al Franken (D-Minn.).

Sales tax prohibition
Under the 1992 U.S. Supreme Court decision in Quill vs. North Dakota, states have been prohibited from compelling retailers that do not have a physical presence in the state from collecting state and local sales taxes. The Supreme Court determined that requiring remote sellers to collect the sales tax was an undue burden on interstate commerce.

Under the complementary use tax, individuals that purchase taxable items are legally required to remit the tax on these purchases. However, due to the fact that states have limited information on consumer purchases via Internet and catalog sales, the use tax is difficult for states to enforce.

Multi-state effort for simplification
The rapid growth in electronic commerce has heightened concerns among states about erosion in sales tax revenues as well as raised concerns about tax fairness between main street businesses and Internet retailers. As a result, more than 40 states, including Minnesota, have been involved in a long-term effort to develop a consistent set of sales tax guidelines among the states in an attempt to address constitutional interstate commerce issues identified in Quill vs. North Dakota decision. The goal of the multi-state effort, known as the Streamlined Sales Tax Project, is to simplify state sales tax systems so that either Congress and the president will ultimately pass legislation to require remote sellers to collect sales tax for states that have simplified their systems, or alternatively that the federal courts will overturn the Quill decision and determine that the simplification is sufficient to remove any undue burden on interstate commerce.

The League’s legislative policies have supported the Streamlined Sales Tax Project, with the goal of leveling the playing field for main street businesses.

Many states already on board
Under the new Marketplace Fairness Act proposal, states would have the option to require out-of-state sellers to collect their state and local taxes through a new, simplified sales tax system. States that voluntarily become members of the Streamlined Sales and Use Tax Agreement (SSUTA) would be able to require remote sellers to collect and remit sales and use taxes after 90 days. A total of 24 states, including Minnesota, have permanently changed their tax laws and have already implemented the requirements of the agreement.

According to the bill’s authors, the SSUTA agreement would help harmonize states sales and use tax rules, bring uniformity to the definitions of items in the sales tax base, reduce the paperwork burden on retailers, and incorporate new technology to modernize administrative procedures related to sales tax collections. The legislation allows sellers who make less than $500,000 in total remote sales in the year preceding the sale to qualify for an exemption and not be required to collect the tax.

Opposition seems to have died down
Internet retailers have vigorously opposed past attempts to create a nationwide sales tax collection responsibility. In contrast, many main street businesses have been supporting attempts to address the Quill decision in order to fairly apply the sales tax to all similar purchases, regardless of whether the purchase is made from a main street retailer or an Internet retailer. However, recent press reports suggest that at least some Internet and catalog retailers are lessening their opposition to sales tax collection responsibilities.

Should the Marketplace Fairness Act ultimately become law, it could halt and reverse the erosion of state sales tax revenues and therefore have a positive impact on Minnesota’s state budget.

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