Tuesday, February 26, 2013
Marketplace Fairness Act Aims To Allow States To Obtain Sales Tax From Large Internet Retailers
On February 14, 2013 a bipartisan group of Senators and Representatives introduced legislation that will supposedly level the playing field between local brick-and mortar retailers and out-of-state Internet retailers. The Marketplace Fairness Act of 2013 would allow states to require out-of-state online retailers to collect sales and use tax on in-state purchases. Businesses with less than $1 million in annual domestic sales would be exempt from the bill. Despite the optimism for the passing of the bill, critics question whether it will achieve its goal of leveling the playing field between local businesses and out-of-state online retailers without introducing a host of unintended consequences.
Currently, due to a 1992 Supreme Court decision, states have been unable to require out-of-state online retailers to collect sales taxes from in-state customers. See Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 313 (1992) (holding that although businesses did not need to have a physical in-state presence to permit the state to require the business to collect taxes from its in-state customers, physical presence within the state is required for the business to have a “substantial nexus” with the taxing state as required by the Commerce Clause). Customers who order products from online retailers from outside of the state are supposed to declare these purchases on their tax forms, but few customers do. Due to this outdated Supreme Court ruling the National Conference of State Legislature reports that, collectively, states miss out on approximately $23 billion in tax revenue annually. Furthermore, local business are at a disadvantage because consumers can walk into these local stores, try out the product that they are interested in, and go home and purchase the item from an out-of-state online retailer without paying the state sales tax.
The current version of the bill combines several proposals from the previous bill that failed to pass last year while incorporating revisions intended to make the bill more palatable to critics and opponents. In particular, the exemption threshold for businesses was raised from $500,000 to $1 million in out-of-state annual sales. The Marketplace Fairness Act of 2013 would empower states to compel out-of-state online retailers to collect sales and use taxes provided that the state simplifies its sales and use tax system. Several online retailers, including Amazon, have expressed their support for the bill.
Despite the optimism and support for the passing of this bill, it is not without critics. Some critics argue that given that one of the prerequisites for states to use this bill is that they must simplify their sales and use tax system, the bill may have the potential to create a complicated new tax system with differences in each state. Furthermore, the legislation may be difficult to enforce because determining whether a retailer is not collecting the taxes may be challenging and needs to be addressed. There are concerns that the bill has a potential to stifle Internet commerce. Large online retailers such as Wal-Mart and Amazon can easily deal with the increase reporting expenses and decreased revenues in out-of-state sales but the smaller online retailers may be forced to keep their sales within their state of operation or confined to states where they have their largest out-of-state sales revenues. The bill, if passed, will likely do the most good in terms of getting states sales revenues that they are already rightfully owed but are not being paid because customers fail to report their out-of state purchases. In this tough economy an infusion of sales revenue may be the much-needed resource that may allow state governments to keep their taxes steady and prevent the need for cuts in programs and services and this bill appears like it has the potential to help in this respect.
The Marketplace Fairness Act appears most misguided in its focus on putting local business on a level playing ground with out-of-state online retailers. The bill may just be slowing down the inevitable. The fact that residents have to pay taxes on goods bought in local business may not be the only reason for why customers are choosing to buy from out-of-state online retailers. The prices of the online retailers may still be significantly lower than the local business even after the passing of this bill because some online retailers are able to provide lower prices due to economies of scale and the fact that they do not have the expense of having locations or warehouses within the state. Therefore, the bill should be presented more as a way for states to obtain revenue that they are rightfully owed and less as a savior of local businesses.
© Copyright 2010 The Journal of High Technology Law, Suffolk University Law School
Suite 450B | 120 Tremont Street | Boston | MA | 02108-4977 | Legal and Copyright Information