In 2013, The Marketplace Fairness Act was proposed in Congress. This Act has stalled, but is worth reviewing due to a recent comment by Justice Anthony Kennedy that it was time to revisit a 50-year-old Commerce Clause ruling. In response to that, the bill was resurrected and on March 10, 2015, in Senate Bill 698, The Marketplace Fairness Act of 2015 was introduced. This Bill would, “ Restore states sovereign rights to enforce state and local sales and use tax laws, and for other purposes”.
50 years ago, we had no Internet (it was in its infancy then), cell phones, or other forms of media by which we currently purchase products and services. The Commerce Clause ruling limited the collection of use tax to physical presence also called “nexus."
What would this Bill mean for states? It would expand the ability of states to collect sales tax from out-of-state businesses that have no physical presence in that state, opening up a new revenue source for states that are struggling with budget issues.
Doing business would ultimately be more complex.
Under current law each state may impose sales tax or use tax on products and services where business have “nexus” within their state. Currently, 45 states have a sales/use tax that sets specific rates and the scope of what services/products will be taxed. Not only states can impose a sales/use tax, but also counties and cities within the state can set certain rates that apply to products and services which may differ from the state specified rates and scope.
This can become important for businesses that perform services or sell products in various states. They must learn those state laws and in some case the local law in order to remain in compliance.
The most famous case that addressed the “nexus” issue is the 1992 case of Quill Corp. v. North Dakota, 504 U.S. 298.
The Supreme Court ruling concerned use tax. Use tax is different from sale tax in that it is imposed on products or services used or consumed within the state. The Quill Corporation was an office supply firm and was not based in North Dakota. It’s offices and warehouse was based in Illinois, California and Georgia. It sold its products through catalogs, magazines and telephone sales, with delivery by mail or common carrier. Based on a change in North Dakota law in 1987, mail order companies were subject to the use tax. Quill challenge that law change and won initially, but ultimately the Commerce Clause was brought into the argument and the case was finally decided by the Supreme Court in favor of Quill.
Based on this decision, states have not been able to collect any form of use tax from retailer’s who does not have nexus in the state. Some states handle the use tax issue based on the individual or business to “self-declare” the use tax as the states for the most part have no way to enforce the tax.
Note that some states can impose a sales tax on retail sales due to agreements between states. Some of those laws are imposed based on volume of sales and other criteria. Generally this has little or no impact on the small business, which makes up the majority of businesses in the United States.
Fast-forward 50 years, and online sales are a major part of businesses across our nation and overseas. Many businesses are truly global entities. States see huge potential to subsidize state budgets. Whereas small businesses see this event as additional tax imposed by government that would be complex and time consuming. Others state it would bring “fairness” to the online sales community.
The bill is worth watching. It may be one of those that “the time is just not right”, but that step is getting closer. As federal budget cuts continue to be imposed and these funnel down to states, states will be looking more seriously at other sources of revenue. Sales and use tax on online sales is just waiting to take its place in federal and state law. For now, we watch and wait – but the wait is probably not as far away as previously thought.
keywords: internet sales, use tax, marketplace fairness act, senate bill 698, commerce clause, sales tax