Sales Tax Collection Bill Moves to US House of Representatives Where It Faces an Uncertain Fate

On May 6, 2013, as anticipated when the Senate recessed last week, the US Senate passed the Marketplace Fairness Act of 2013 (S. 743). The bill’s passage was the culmination of a flurry of action by the Senate in recent weeks, including an April 25th procedural vote that ended debate on the bill and sent the bill to the floor of the Senate which passed the bill by an overwhelming majority.

The Senate-passed bill would allow states to require the collection of sales tax on remote sales. In exchange for this new power to collect taxes, states would have to simplify their sales tax systems and provide free software to allow sellers to calculate sales taxes and file sales and use tax returns. Remote sellers who have annual receipts of less than $1 million nationwide would be exempt from any collection responsibilities.

Under the Senate-passed bill, states that wish to participate would be required to implement a simplified sales tax system. Simplifying their sales tax would mean implementing certain "minimum simplification requirements" which would include a single point of tax administration, a single audit, a single sales tax return, a uniform sales tax base, and uniform souring rules, among other requirements. As a result of a state's implementation of that system, the bill would require online sellers with annual revenues in excess the $1 million threshold to collect and remit all the sales taxes that would be due in that state where the buyer is located.

Genesis of Marketplace Fairness Act

The bill seeks to resolve an issue that has been contentious for decades. It is directly in response to the 1992 U.S. Supreme Court decision in Quill v. Commissioner [504 U.S. 298 (1992)], a decision from the mail-order catalog era where the US Supreme Court prevented states from applying their sales taxes to transactions by sellers that lacked a "physical presence" in their state. The issue has become really one of the seller’s obligation to collect tax since buyers are supposed to pay such sales taxes (more appropriately called "use" taxes) to their home states. This is often done when the buyer files his own annual income tax return. However, self-reporting and payment by consumers is low and so states claim they are losing billions of dollars in unpaid taxes. As a result, some argue that the current situation has given an advantage to online retailers over the more traditional "Big Box" retailers which have stores or a warehouse in a state.

For just over a dozen years now, the states have attempted to resolve this issue themselves, through implementation of The Streamlined Sales and Use Tax Agreement. That Agreement, signed by some 24 states, established the minimum simplification requirements adopted under the bill. If the Marketplace Fairness Act is enacted, those states which are members of the Streamlined Sales and Use tax Agreement may essentially require remote sellers to collect and remit sales tax in all member states based generally on the location of the customer. Likewise the remaining half of the states that are not member states under the Streamlined Sales and Use Tax Agreement would be authorized to require remote sellers to collect and remit sales tax if that state adopts those minimum simplification requirements.

The debate now moves to the House of Representatives where the bill awaits a more critical reception. Unlike in the Senate, where the bill went straight to the Senate floor, bypassing the Senate Finance Committee, the committee of jurisdiction and whose chairman opposed the bill, the House Judiciary Committee, is expected to be given time and latitude to consider carefully the bill. As part of that process, amendments, both technical and policy-based, are expected to be considered which may refine or alter the legislation in a number of ways. Among other items, the small seller exception has long been a point of contention. Increased from an initial exception of $150,000, there has still been substantial discussion as to what this minimum threshold should be, and whether $1 million is high enough. Further, whether the bill is ultimately viewed by House Members as “tax fairness” or a “tax increase” will very much affect its likelihood of passage in the House.