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Update: The Marketplace Fairness Act

July 13, 2012 – Porter Wilson

Washington, DC – The Congressional debate, more than a decade old, about how to allow states to collect sales taxes from online retailers, may be coming to a head.

Last year, in a letter to Sen. Richard Durbin (R-IL), a bipartisan co-sponsor of The Marketplace Fairness Act, American Booksellers Association (ABA) CEO Oren Teicher wrote:

"We firmly believe the Marketplace Fairness Act would help to level the playing field by authorizing states to require out-of-state retailers to collect and remit sales tax to the state for purchases made by their residents.  Moreover, it would assist the states in collecting approximately $23 billion in uncollected state sales taxes that are currently due on Internet and catalog sales."

"As we know you understand, the Marketplace Fairness Act does not, in any way, impose a new tax.  This is an issue of state rights and the federal government providing states with the authorization to require remote retailers to collect and remit sales tax in the state – rather than requiring consumers to declare the use tax on their income tax statements. Importantly, this legislation does not compel any state to join.  However, any state that chooses to adopt this system would then have the authority to require online retailers to collect and remit sales taxes."

Retailer and Government Associations Agree

Along with the ABA, hundreds of organizations, including the National Retailers Federation (NRF), the International Council of Shopping Centers (ICSC), and the Retail Industry Leaders Association (RILA), as well as, many other merchant associations nationwide, have been lobbying Congress for legislation that would, as their members see it, end the advantage that web based retailers have because of the 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298) that "prohibits states from requiring remote sellers to collect sales and use taxes owed on in-state purchases unless the seller has a physical presence through a store, office, warehouse, or sales force."

And the states, with shrinking revenues due to the recent economic downturn, want that "approximately $23 billion." And associations of government officials have joined in the move for a change.  Those associations include the National Governors’ Association (NGA), the National Conference on State Legislatures (NCSL), the National Conference of Mayors (NCM), the National League of Cities (NLC), the National Association of Counties (NACo), and the Governing Board of the The Streamlined Sales and Use Tax was created by the National Governor’s Association (NGA) and the National Conference of State Legislatures (NCSL), and the Governing Board of the Streamlined Sales and Use Tax Agreement, which was created after the passage of the Internet Tax Freedom Act in 1998 by the NGA and NCSL to develop a simpler, more business friendly tax collection system.

States Stand to Gain Much Needed Revenue

According to Sen. Durbin, the enactment of legislation allowing for the collection of sales tax on online purchases could benefit the states greatly:

California could collect $4.1 billion and reduce its budget shortfall by nearly 20 percent.  New York could collect $1.8 billion which equals about one-fifth of the state’s total budget deficit.  Illinois could shrink its budget deficit by nearly 20 percent.  Ohio could collect $629 million and reduce its budget deficit by 20 percent.  Oklahoma could collect $296 million and reduce its budget shortfall by 59 percent.  Georgia could collect $838 million and eliminate 65 percent of its budget shortfall. Alabama could collect nearly $350 million.  Arizona could collect $798 million.  Colorado could collect $352 million.  Florida could collect nearly $1.5 billion.  Kentucky could collect $225 million.  The total that states could collect is $23 billion.

Opposition and Exemptions

The Marketplace Fairness Act (S. 1832) and its House counterpart, The Marketplace Equity Act (HR 3179), both introduced last year, have been opposed by the Computer and Communications Industry Association (CCIA), an online trade association whose members include EBay, Facebook and Google.

On its website, the CCIA states "The Computer & Communications Industry Association (CCIA) opposed the Marketplace Fairness Act when it was first introduced, and we remain opposed to it, as it would impose tax collection burdens on small Internet businesses, which are some of the most promising candidates for future economic growth."

But both bills have small-seller exemptions.  In the Senate bill, a store would have to have more than $500,000 in remote sales nationally before it would have to collect sales tax in a state other than its own.  The 24 states that are part of the Streamlined Sales and Use Tax Agreement would be required to collect and remit sales tax by the Senate bill.  The senate bill also provides the remaining states with the authority to do so as well but does not mandate they do.

In the House bill, the exemption is larger.  Unless a store has more than $1 million in remote sales nationally (i.e. Internet, catalog, and/or toll-free sales, but essentially Internet sales), or more than $100,000 in remote sales into any one state, it would be exempt from collecting sales tax in other states besides its own.  The House bill provides states with the authority to require remote retailers to collect and remit sales tax but does not in any way mandate that they do so.

Amazon Supports The Marketplace Fairness Act

But, with over $48 billion in sales in 2011, is the largest Internet retailer and is a supporter of The Marketplace Fairness Act.

In the past, Amazon has opposed the collection of sales tax on a state-by-state basis on the grounds that it is unconstitutional.  In its 1992 ruling, the Supreme Court stated that, with over 7500 taxing jurisdictions, requiring the collection of sales tax for out-of-state sales would be unduly burdensome on interstate commerce.  And in 2008, Amazon filed suit against the state of New York because of a law requiring the collection of state sales tax on online purchases made in the state calling it unconstitutional.

And although, in his ruling this past spring, U.S. District Judge Robert Blackburn did declare Colorado’s 2010 "Amazon Tax" unconstitutional, recently Amazon has entered into sales tax collection agreements with several states.

According to Amazon, it currently charges a sales tax to residents in Kansas, Kentucky, North Dakota, New York, and Washington.

On July 1, 2012, Amazon began collecting sales tax in Texas.

California’s "Amazon Tax" collection will begin in September 2012.

An agreement with New Jersey requires the collection of taxes starting in July 2013.

Virginia will begin to require the collection of sales tax on online purchases next year.

Nevada, South Carolina and Tennessee also have agreements with Amazon.

But believing that online retailers are obligated to collect state sales tax, the Arizona Department of Revenue has levied a $53 million assessment against Amazon for unpaid sales taxes.

And some, like Maryland’s Gov. Martin O’Malley (D), want to tax songs and other digital products bought through popular sources such as iTunes.

A Fair Way To Collect

For now, states are making individual and individualized deals with just one online retailer – Amazon.  But the bills before Congress will as Sen.  Durbin stated in a remarks before the NACO’s 2012 Legislative Conference give states choices and a simplified system for sales tax collection in the Internet Age:

"Let me be clear:  The Marketplace Fairness Act is not a new tax.  It is not a tax on the Internet.  It simply gives states the ability to close the online sales-tax loophole created when out-of-state sellers don’t collect, and purchasers don’t pay, state sales tax – even though they still owe it."

States have a choice.  They can require out-of-state businesses to collect sales taxes – or they can keep things the way they are. It’s up to each state to choose.

If they decide to collect sales and use taxes from out-of-state sellers, the Marketplace Fairness Act gives them two options.  States can join the Streamlined Sales and Use Tax Agreement as 24 states already have.  If they don’t want to do that, they can pass their own sales tax collection laws, as long as it meets certain basic simplification requirements.

Retailers will receive the software to calculate state and local sales taxes.  All a business will have to do is type in an address and click the mouse.  In less than a second, the software will calculate the sales taxes owed – the same way online sellers calculate shipping costs now."

That means that states that do not have sales tax like Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon will not have to be affected.  It also means that all non-exempt sellers, not just the largest, will have a standardized way to collect and remit sales taxes just like brick-and-mortar businesses.