- January 2014
Twenty years ago in Quill v. North Dakota (504 U.S. 298 (1992)), the U.S. Supreme Court ruled that the lack of a physical presence (“substantial nexus”) in a State by an out-of-state seller (including catalog and on-line sellers) prevents that State from compelling the remote seller to collect and remit that State’s sales and use tax. Where the seller does not do so, it falls on the local purchaser to remit the tax to the State. Although this has proven extremely difficult to enforce, purchasers can be audited and may be subject to penalties for failing to remit their owed sales taxes to their states. The Court invited Congress to resolve this issue, stating, “The underlying issue here is one that congress may be better qualified to resolve and one that it has the ultimate power to resolve.”
Since the court’s disposal of the Quill case, the volume of e-commerce has and continues to grow (e-commerce sales in the retail sector along reached $140 billion in 2010), principally as a result of on-line sales via the internet. The evolution of this marketplace dynamic places “brick and mortar” sellers which must collect and remit state sales and use taxes at a clear price-generated competitive disadvantage (as much as 10 percent in some states) with their on-line competitors.
Against the backdrop of Quill the growth of e-commerce also exacts a substantial toll on financially strapped state governments which on average derive 20 percent of their annual revenue from sales and use taxes. Unless Quill is overruled by Federal legislation, the already vast amount of lost state revenue – the National Conference of State Legislatures (NCSL) estimates that states stood to lose approximately $23 billion in owed but uncollected sales tax revenue in 2012 – will continue to grow as the volume of e-commerce continues to grow.
This issue has been debated on Capitol Hill for the better part of the past decade. In April 2013, the U.S. Senate passed S. 763, the NAW-supported Marketplace Fairness Act (“MFA”) (Enzi (R-WY) and Durbin (D-IL)) on a strongly bipartisan 69 – 27 vote. S. 764 proposes to empower the states to require sellers not qualifying for a small seller exemption to collect and remit sales and use taxes on remote sales. Similar legislation has been introduced in the House (HR 684, Womak (R-AR-3) and Speier (D-CA-14)), but neither the Senate-passed measure nor its companion House bill will be the vehicle for action in the House. Instead, proponents of marketplace fairness legislation, including NAW in concert with our allies in the Marketplace Fairness Coalition (NAW serves on the coalition’s Management Committee) are working with House Judiciary Committee Chairman Robert Goodlatte (R-VA-6) to develop a bill based on seven principles Chairman Goodlatte unveiled in September, namely:
- Tax Relief – Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.
- Tech Neutrality – Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.
- No Regulation Without Representation – Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.
- Simplicity – Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.
- Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.
- States’ Rights – States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.
- Privacy Rights – Sensitive customer data must be protected.
Proponents’ near-term goal is to secure House Judiciary Committee hearings on this issue at the earliest possible date.
One seemingly simple yet significant judicial action in this area has gained national attention. In early December 2013, the U.S. Supreme Court chose not to review the New York Court of Appeals’ (New York’s highest court) validation of New York’s “Amazon Law” which requires on-line retailers without a physical presence in New York to collect and remit sales tax if they use in-state affiliates to conduct business. It remains to be seen how other states will respond to the Supreme Court’s action in the New York case, and again puts the ball squarely in Congress’ court if a nationwide approach to this issue is to be developed. It also remains to be seen whether/how the opposition to the MFA of the major on-line “players” with the exception of Amazon (which supports the legislation) will be affected by this Supreme Court action, or if this development will have any impact on the activities of conservative groups such as Heritage Action which oppose the MFA.