Marketplace Fairness Act Targets Out-Of-State Sellers
Through our legislative contacts and lobbyists, PPAI has access to up-to-the-minute information, insight and analysis that you won’t see published anywhere else. The information in this month’s special Washington Report focuses on the Marketplace Fairness Act and the debate over the collection of sales and use taxes from consumers by out of state sellers. It is timely information that will help you become more aware and better prepared to advocate for your business, profession and industry.
I hope you find this information beneficial to your business.
Legislation has been introduced that addresses a long-standing debate over the collection of sales and use taxes from consumers by out-of-state sellers for the states in which those consumers reside.
The Marketplace Fairness Act, introduced in the Senate as S. 336 and in the House as HR 684, reflects several states’ acceptance of the Streamlined Sales and Use Tax Agreement (SSUTA) in 2002. The SSUTA is essentially a multi-state agreement to simplify national sales tax laws by establishing a uniform system of administering and collecting sales tax on out-of-state retail transactions—these transactions alone add up to several trillion dollars.
The SSUTA was approved in 2002 by a vote of representatives of 33 states and the District of Columbia. That number currently stands at 44 states.
The effort as it is being implemented by participating states is known as the Streamlined Sales Tax Project (SSTP). Twenty-four states representing more than 33 percent of the nation’s population have adopted the simplification measures set forth in the SSUTA by passing legislation that conforms to the agreement.
Under the SSUTA, member states are allowed to require remote sellers to collect and remit sales-and-use taxes after 90 days. The legislation exempts sellers who make less than $1 million in total remote sales in the year preceding the sale; they qualify for an exemption and would not be required to collect the tax.
States that do not want to become SSUTA members would only be allowed to collect sales and use taxes on out-of-state transactions if they adopted certain minimum simplification requirements and if they provided sellers with additional notices on the collection requirements, which are similar to but less comprehensive than SSUTA member conditions.
Sales And Use Tax History
The legislation’s history dates back more than four decades. Under the structure of state taxation, sales and use taxes are imposed on the consumer. The obligation on the seller, if any, is to collect and remit the tax. While the sales tax is the component collected by a seller on a transaction occurring within the state, the use tax is essentially a fictional component created to capture the tax made on out-of-state sales.
The purchaser is obligated to pay the use tax on any goods or services bought out of state and used in the state. Theoretically, the purchaser is always obligated to pay either the sales tax or the use tax. But few purchasers voluntarily pay the use tax and it is impossible to enforce compliance on a purchaser-by-purchaser basis.
A state can force a seller to collect sales tax since it has jurisdiction over the seller and can use leverage—such as the seizure of assets—to force compliance. If the seller has a facility in the state, the question of jurisdiction is easily resolved. In the case of an out-of-state seller, determining whether the seller has sufficient contact with a state to warrant collecting use tax from an in-state purchaser has been disputed long before the Internet became a marketplace.
In National Bellas Hess v. Illinois Department of Revenue (1967), the Supreme Court ruled that states could not collect a sales or use tax from a firm that did not maintain a retail outlet within the state’s boundaries. In legal parlance, the company had to have “nexus,” or a connection with the state, upon which the state could claim jurisdiction.
In 1992, the Supreme Court decided the Quill Corp. v. North Dakota case involving a North Dakota statute drafted to specifically circumvent National Bellas Hess case. The North Dakota statute was drafted to define nexus to include “regular or systematic solicitation of a consumer market.” Regulations further defined this as three or more advertisements within a 12-month period.
Justice Stevens, speaking for the Supreme Court, said: “We do not share [North Dakota’s] conclusion that the ruling of Bellas Hess is no longer good law.” The Supreme Court, however, did make an observation that is essential to understanding the significance of the Streamlined Sales Tax Project agreement and possible federal legislation on nexus: “Our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.”
The Marketplace Fairness Act is the proponents’ answer to this suggestion.
The following states have passed legislation to conform to the SSUTA:
Arkansas; Georgia; Indiana; Iowa; Kansas; Kentucky; Michigan; Minnesota; Nebraska;
Nevada; New Jersey; North Carolina; North Dakota; Ohio; Oklahoma; Rhode Island;
South Dakota; Tennessee; Utah; Vermont; Washington; West Virginia; Wisconsin; Wyoming
The lead sponsors of the Marketplace Fairness Act are:
Sens. Mike Enzi (R-WY); Dick Durbin (D-IL), Lamar Alexander (R-TN); Heidi Heitkamp (D-SD)
Reps. Steve Womack (R-AR); Jackie Speier (D-CA); Peter Welch (D-VT); John Conyers (D-MI)
Additional co-sponsors of the legislation:
House of Representatives
Aaron Schock (R-IL); Dennis Ross (R-PA); Chris Gibson (R-NY); Steve Cohen (D-TN);
Mario Diaz-Balart (R-FL); Judy Chu (D-CA); Ander Crenshaw (R-FL); Chellie Pingree (D-ME);
Renee Ellmers (R-NC); Allyson Schwartz (D-PA); Don Young (R-AK); Keith Ellison (D-MN);
Ted Poe (R-TX); Ted Deutch (D-FL); Rick Crawford (R-AR); Linda Sanchez (D-CA);
Michael Grimm (R-NY); Niki Tsongas (D-MA); Charlie Dent (R-PA); Hank Johnson (D-GA);
Mark Amodei (R-NV); Michael Capuano (D-MA); Mike Conaway (R-TX); Betty McCollum (D-MN);
Kristi Noem (R-SD); John Larson (D-CT); Lou Barletta (R-PA); James Langevin (D-RI);
Tim Griffin (R-AR); Eleanor Norton (D-DC); Suzan DelBene (D-WA).
Tim Johnson (D-SD); John Boozman (R-AR); Jack Reed (D-RI); Roy Blunt (R-MO);
Sheldon Whitehouse (D-RI); Bob Corker (R-TN); Mark Pryor (D-AR); Jay Rockefeller (D-WV);
Amy Klobuchar (D-MN); Al Franken (D-MN); Ben Cardin (D-MD); Dianne Feinstein (D-CA);
Mary Landrieu (D-LA); Joe Manchin (D-WV)