This week, the United States Senate passed the Marketplace Fairness Act (S. 743) by a vote of 69 - 27.
The Act, approved by the Senate on May 6, would permit each state to require vendors from other states to collect sales and use taxes on the state's behalf, from vendor sales of taxable goods and services to state residents.
The House of Representatives is expected to consider the legislation later in the year, but the outlook for the Act’s passage in the House is not clear. The Act’s opponents have cited the tax collection and remittance burden the Act would place on Internet vendors, particularly those vendors located in states that do not currently have a sales tax. Proponents of the legislation counter that the burden is minimized by the Act’s requirement that states provide software to vendors free of charge to calculate the tax due on sales within the state. The Act further exempts from its provisions vendors with $1 million or less in remote nationwide sales during the preceding year.
Various versions of the Act have been introduced in Congress over the last decade in response to state concerns that billions of dollars in sales and use taxes go uncollected. Under current federal constitutional case law, “remote” or out-of-state vendors are not required to collect taxes on sales to state residents unless the vendor has a physical presence within the taxing state. The physical presence nexus standard was adopted by the United States Supreme Court in 1992 in Quill v. North Dakota (504 U.S. 298). The Quill court specifically recognized, however, that Congress has the power to establish nexus guidelines that need not be consistent with Quill’s physical presence requirement.
The proliferation of e-commerce in the years since Quill was decided has resulted in an ever-increasing volume of transactions for which no tax is collected. Although consumers are technically liable in most states to self-report and pay use tax on untaxed purchases, the tax is rarely paid and only sporadically enforced.
Online sellers of goods and services should remain vigilant regarding their tax collection obligations. In particular, cloud computing and Software as a Service vendors should continue to monitor their nexus status and the taxable or non-taxable characterization of their products by the various states in which they have customers. A vendor’s tax collection responsibilities can become more complicated when a sale constitutes a “bundled transaction” involving the provision of taxable and non-taxable products for a single price or where customers will use or benefit from digital goods or services purchased online in more than one jurisdiction.