California and the other 49 states could soon collect millions of dollars from online sales taxes. Last week, Reuters News reported that U.S. House and Senate introduced the Marketplace Fairness Act of 2013 (The Bill). This is Indeed, a remarkable turn of events, given the often toxic relations between the House and Senate. Lawmakers finally appear to be in agreement that the time has come for the States to be permitted to collect sales and use taxes from remote sellers, and have recently assured state lawmakers they would pass a law in 2013.
As internet sales have increased, states have looked to tax online retail sales:
In the last decade, Internet sales have gone from 1.6 percent of all U.S. retail sales to more than 5 percent, according to Commerce Department data, a proportion that will likely grow as shoppers turn more to handheld devices to make purchases. In the third quarter of 2012, retail “e-commerce” sales were $57 billion, the department said.
Currently, states can only tax Internet sales made by companies with a physical presence within state borders. This results in a patchwork of state tax obligations meaning that online retailers such as Amazon.com collect sales tax in some states but not in others.
The current law can be traced to National Bellas Hess, Inc. v. Ill. Dept. of Revenue, in which the U.S. Supreme Court declared that out-of-state retailers only have a sales tax collection obligation if there is physical presence or nexus. In that case, Bellas Hess, a mail order company, incorporated in Delaware distributed catalogs to customers who would return order forms and then receive their items via common carrier. In Bellas Hess, Illinois argued that any company soliciting customers in the state must collect sales tax but, the Supreme Court rejected that approach. Finding that Bellas Hess had no physical presence in Illinois, the Court ruled that they had no collection obligation existed. In 1992 the Supreme Court decided Quill v. North Dakota reaffirming Bellas Hess.
The Bill, however, looks to undo Quill and Bellas Hess. The Bill grants individual states the authority to compel online and catalog retailers to collect state sales tax at the time of a transaction, no matter where they are located, just like local retailers are already required to do. There is a caveat, however; states are only granted this authority tax after they have simplified their own sales tax laws.
“Small businesses and states alike are suffering from the inability to collect due – not new – taxes from purchases made online,” said Republican Representative Steve Womack, from Arkansas, adding the legislation is a “bipartisan, bicameral, common-sense solution that promotes states’ rights and levels the playing field for our Main Street businesses.”
The Bill provides two options for states to “simplify” their tax law. Under the first option:
A state can join the twenty-four states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last eleven years by forty-four states and more than eighty-five businesses with the goal of making sales tax collection easy. Any state which is in compliance with the SSUTA and has achieved Full Member status as a SSUTA implementing state will have collection authority on the first day of the calendar quarter that is at least 90 days after enactment
Alternatively, states may agree to:
1. Notify retailers in advance of any rate changes within the state
2. Designate a single state organization to handle sales tax registrations, filings, and audits
3. Establish a uniform sales tax base for use throughout the state
4. Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there)
5. Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data
Numerous state agencies and organizations have applauded the Bill, believing this gives them the opportunity to tackle their budget shortfalls.