- What You Need To Know About The Proposed Marketplace Fairness Act
- September 30, 2013 | Author: Thomas Kendall
- Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cincinnati Office
You may have heard about recent efforts to pass Federal legislation known as the “Internet sales tax” or “Amazon tax.” This proposed legislation is formally known as the Marketplace Fairness Act of 2013 (“the MFA”). If enacted, the MFA’s impact would extend well beyond Internet giants. It could significantly expand the number of transactions in which remote (Internet, phone, or mail-order) sellers are required to collect and remit sales and use taxes. The Act could also increase the administrative and recordkeeping burdens on those businesses that ship their goods or offer their services across state lines.
Why is the MFA being proposed?
In 1992, the Supreme Court decided Quill Corp. v. North Dakota, holding that a state may only collect taxes on remote sales if the seller has a physical nexus to the state.1 Thus, absent Federal legislation, remote sellers are only required to collect sales taxes in states where they have a physical business presence. Sellers are not required to collect taxes on remote sales, made to buyers located in states where the seller does not have an office, warehouse, or employees.
In most cases, the buyer in such a sale is obligated to pay a use tax on the transaction, to their state of residence. While many businesses properly report and pay use taxes on their remote purchases, very few consumers do. According to the U.S. Census Bureau, in 2010, e-commerce comprised 4.0% of all retail sales in the United States. As the share of remote (Internet) sales continues to rise, states and local governments have increasingly begun to miss out on taxes from purchases made by their residents.
The MFA has been proposed amid a backdrop of new state laws designed to capture as much sales and use tax revenue as possible, in light of the expansion of e-commerce and the Quill decision. For example, Missouri recently expanded its nexus definition to include sellers who receive referral “clicks” from Missouri affiliates.2 With the backing of major retailers, 24 states have enacted a version of the Streamlined Sales and Use Tax Agreement, which establishes a framework for the voluntary collection of taxes on remote sales.3 According to the Streamlined Sales Tax Governing Board, Inc., more than 1,400 retailers already voluntarily withhold sales and use taxes on remote sales.4
How does the MFA work?
The MFA would alter the existing system by authorizing states to require remote sellers located within their borders to also collect use taxes on all remote sales for which the buyer is obligated to pay use tax to their home state. A remote seller would then be obligated to remit taxes to and file returns with as many as 46 different states (the number which currently impose a state or local sales and use tax). To meet this obligation, the seller requires at least three critical pieces of information: (1) the state and local jurisdictions in which each buyer is situated, (2) the applicable sales and use tax rates in those jurisdictions, and (3) the applicable filing requirements and procedures.
To help ease this burden, the MFA requires states to “simplify” their sales and use tax laws by providing free software to assist with tax calculation and filing requirements, and designating a single, state-level administrator of all state and local taxes from remote sellers. The MFA also contains a “small seller exception”, which means that the Act would not apply to sellers whose gross annual revenue from remote sales does not exceed $1 million. There is no provision for indexing or automatic increase of this threshold.
Support, opposition, and the future
Although the MFA is backed major retailers (including Amazon.com), unions, and trade organizations,5 it is not without critics. In particular, owners of small businesses that depend upon Internet sales have expressed concern the IT expenses and increased audit risk posed by the MFA would threaten their viability.6 Additionally, opinion and editorial writers have posited that, even though the MFA does not impose new taxes, the possibility of cross-border enforcement of state and local taxes is inconsistent with principles of state sovereignty.
The MFA was passed by the Senate on May 6, 2013, with a bipartisan majority. Current news reports suggest that the Act is unlikely to pass the House of Representatives this year. Nonetheless, the Act enjoys broad support and will likely be re-introduced in the future. Therefore, any individual or business who sells at least $1 million of goods or services annually to out-of-state customers should be aware of the MFA or similar legislation in the coming months and years.
1. 504 U.S. 298.See 2013 Mo. HB 184.
5. See, for example, “Calling Foul on the Marketplace Fairness Act”, Rick Smith, Opinion, WSJ.com, Aug. 7, 2013.
6. See, for example, “Marketplace Fairness Act Has It Backwards”, John Conway, Huffingtonpost.com, May 29, 2013, http://www.huffingtonpost.com/john-conway/marketplace-fairness-act-taxes&under;b&under;3343530.html.