Digging Deeper into Online Sales Tax

See where the issue started and how officials have tried to tackle it.

by Sarah Brown
- May 01, 2013

Editor's Note: This is part one of a two-part series that takes a closer look at online sales tax.

Once again, online sales tax laws are a hot topic in Washington, D.C., now in the form of what's being called the Marketplace Fairness Act of 2013.

Like former bills, the new act intends to give states the authority to require remote and online sellers to collect and pay sales taxes from their buyers.

Now that the 112th Congress has ended, previous bills on the matter have been taken off the table, but it didn't take long for the 113th Congress to propose similar legislation with a very familiar name.

While each proposal is complex, here we look at a short history of past proposals. Part two of this series will explore the new Marketplace Fairness Act of 2013. The Senate is expected to vote on the bill on Monday.

Birthplace of the online sales tax debate

The 1967 Supreme Court case National Bellas Hess v. Illinois Department of Revenue set a legal precedent and unwittingly initiated today's online sales tax debate.

In short, out-of-state retailers were exempt from collecting sales tax simply because it would place unfair administrative hardship on said retailers since the tools for recordkeeping back then were limited. Requiring businesses to maintain tax rules for each jurisdiction was too demanding and could slow the progress of interstate commerce.

Because of the 1967 Bellas Hess ruling, today's Internet retailers have not been required to collect sales and use taxes

After Internet service became available to the public, another court case arose regarding cross-state sales. While the 1992 Quill v. North Dakota case was about mail orders, the court's decision to stand by the 1967 precedent solidified the fact that Congress must be the entity to impose remote sales taxes.

Sales and use taxes have always been imposed upon consumers by state law. Yet, because of the Bellas Hess ruling, today's Internet retailers have not been required to collect these taxes, and states have little room to enforce and collect taxes from buyers.

However, the Quill ruling did leave some wiggle room for states to enforce tax collection based on "nexus." Sylvia F. Dion, a certified public accountant and tax consultant, has been closely following the evolution of e-commerce tax moves in Congress.

"In [the Quill] decision the Supreme Court held that in order for a state to impose a sales tax collection requirement on a company participating in interstate commerce within the state's borders, 'substantial nexus' must be shown," she notes in a blog post. "According to Quill, substantial nexus requires a physical presence (e.g., offices, employees) in the state."

Amazon leads the way

As a result, brick-and-mortar businesses have become increasingly burdened, some say. Not only are they collecting and paying sales tax in their states—if their states have sales tax in place—but they are also losing local consumers to out-of-state online merchants.

To level the playing field, states began enacting what became coined as "Amazon tax laws," placing the e-commerce giant at the forefront of the online sales tax debate because it is one of the most widely recognized businesses targeted by the law. States were creating these laws as a way to establish nexus if remote sellers were affiliated with local entities.

For example, Amazon would have a physical presence—and nexus—in New York state if a blogger based in that state had links on his or her site that referred people to Amazon. According to these Amazon tax laws, Amazon would be responsible for collecting sales tax from their New York buyers because these links would qualify as nexus.

New York state initiated this journey into the hotly debated Amazon tax in April 2008 and several states have since attempted to enact similar legislation.

The Marketplace Equity Act would allow states to impose sales tax collection on remote sellers, but the states must 'implement a simplified system'

The federal government steps up

Meanwhile, Congress has been working on a national policy. The Main Street Fairness Act was proposed July 2010 by the House of Representatives (H.5660), followed by bicameral online sales tax legislation (S.1452 and H.2701) in July 2011 with the same name.

"This legislation states that its purpose is 'to promote simplification and fairness in the administration and collection of sales and use taxes,' and is based on several key findings including that sales transactions should be taxed equally, as a matter of economic policy and basic fairness, regardless of how they are transacted; that Congress has the power to facilitate equal taxation based on Quill; and that states that voluntarily and adequately simplify their tax systems should have the authority to require sellers to collect sales tax regardless of where the seller is located," Dion notes.

Under this law, only full member states of the Streamlined Sales and Use Tax Agreement would have the authority to impose sales tax collections on remote sellers.

Several months later, in October 2011, another bill was proposed "to improve the states' rights to enforce the collection of state sales and use tax laws, and for other purposes."

This was titled the Marketplace Equity Act (H.3179) and would allow any state to impose sales tax collection on remote sellers, but the states must "implement a simplified system for the administration of remote seller's sales and use tax collection responsibilities," Dion adds.

A rival bill made its presence known the following month. The Marketplace Fairness Act (S.1832) seemed to be a compromise between the MSFA and MEA. In summary, it granted full-member SSUTA states tax collection authority but also provided authority to other states who would adopt MFA's alternative simplification requirements.

Part two of this series, "2013 Marketplace Fairness Act Keeps Tax Debate Alive," will look at the current online sales tax proposal and how sellers should respond.

About the Author

Sarah Brown is a freelance writer who writes about e-commerce and small businesses. She recently graduated from Chico State with a journalism degree and is also a budding online entrepreneur, having launched two Web businesses and her own line of handmade products.

Opinions expressed here may not be shared by Auctiva Corp. and/or its principals.

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