The 2012 Minnesota legislative session kicked off on January 24th with the reading of several bills that were pre-filed during the legislative recess. Included with these bills is a bill for “Internet Sales Tax Fairness” that, if passed, would require Minnesota consumers to pay state sales taxes to internet retailers who do not maintain retail locations or other facilities within the State of Minnesota. H.F. No. 1849, 87th Minn. Leg., Reg. Sess. (Jan. 13, 2012).
Under current federal law, developed by the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a retailer is exempt from collecting sales taxes in states where it does not have a physical presence, or a “substantial nexus.” Included within this exemption are out-of-state internet retailers like Amazon.com and Overstock.com, who conduct significant business within the state but do not maintain any physical retail locations or distribution centers in Minnesota. While individual Minnesota consumers benefit by avoiding sales taxes when shopping at these internet sites, local vendors suffer to the competitive advantage gained by these internet retailers.
The proposed legislation seeks to expand the interpretation of “substantial nexus” for the purposes of sales tax liability. Under the Internet Sales Tax Fairness bill, a retailer would be “presumed to have a [physical presence] in this state if it enters into an agreement with a resident under which the resident . . . directly or indirectly refers potential customers, whether by a link on an Internet Web site, or otherwise, to the seller.” The purpose of the bill, according to Governor Mark Dayton, is to “level the playing field” between internet market giants who gain a competitive advantage over Main Street Minnesota by charging 6.875 percent less, the Minnesota sales tax rate, than local competitors with a physical presence in the state. The Governor’s office estimates that the Internet Sales Tax Fairness bill, if passed, would generate about $3.5 million in revenue in 2013.
Similar legislation has twice been defeated in Minnesota, but several other states have adopted laws, often labeled “Amazon Tax” laws, expanding a retailer’s “substantial nexus” within state boundaries. New York enacted its internet sales tax law in 2008, followed by Rhode Island and North Carolina in 2009, and Illinois, Arkansas, Connecticut, and California in 2011. Similar bills have either been proposed or are pending in several other states. Texas also passed its Amazon Tax legislation last year, months after the state issued an assessment of $269 million to Amazon.com for uncollected state sales taxes arising from an Amazon.com affiliate’s operation of a distribution center in Irving, Texas, considered to be a physical presence worthy of sales tax collection by the State of Texas.
Federal lawmakers have also pushed for new rules related to the collection of state income taxes by online retailers, the most recent bill being the Marketplace Fairness Act, United States Senate Bill 1832/HR 3179 (2011). The Marketplace Fairness Act would simplify diverse tax jurisdictions and offer two options for states to collect sales taxes from catalog and online sales, regardless of whether the retailer has a physical presence in the state in which the good is purchased. States that become a member of the existing Streamlined Sales and Use Tax Agreement (SSUTA), established to simplify and modernize sales and use tax administration, would be able to require internet and catalog retailers to collect and remit sales taxes within ninety days of collection. States that do wish to join SSUTA would be allowed to collect the sales and use taxes if they adopt minimum simplification requirements. Minnesota is a SSUTA member. The Marketplace Fairness Act is supported by Amazon.com, as well as retailers such as Walmart, Best Buy, and Home Depot, retailers with a physical presence in most states who also maintain a large online presence.