- January 2015
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 alone reached $140 billion in 2010), principally as a result of on-line sales via the internet. According to the 2013 NAW Institute for Distribution Excellence/IBM study Facing the Forces of Change: Reimagining Distribution in a Connected World ®, in the same way that the shift toward e-commerce is “rapidly transforming the retail landscape … e-commerce will now continue to transform wholesale distribution … by 2017, a full 92% of distributors surveyed will offer e-commerce … On average, online orders make up 9% of distributor revenues today, but that proportion is expected to surge to 21% by 2017, an increase of 130%.” Fourth quarter 2013 survey data reported in Modern Distribution Management (MDM) in early 2014 reveals that 21% of respondents see on-line only players as a larger competitive threat than their “traditional” competitors. 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. In September 2013, House Judiciary Committee Chairman Robert Goodlatte (R-VA-6), an opponent of the Senate-passed bill, unveiled seven principles to guide the development of legislation on this topic, 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.
On March 12, 2014 the House Judiciary Committee held a hearing to explore Chairman Goodlatte’s principles in the context of “Alternative Solutions on the Internet Sales Tax Issue.” Ultimately, neither the Senate-passed bill nor its bipartisan House companion (H.R. 684 (Womack, R-AR-3 and Speier (D-CA-14)) received a vote in either the Judiciary Committee or by the full House. Regrettably, an effort to include a modified version of the Marketplace Fairness Act led by Rep. Jason Chaffetz (R-UT-3), a member of the Judiciary Committee, in a broad session-ending legislative package came up short, ensuring that proponents will mount an effort to enact e-fairness legislation again in the 114th Congress.