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NAW News

Marketplace Fairness

- April 2015

Twenty-three 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 tax. Where the seller does not do so, it falls on the local purchaser to remit the tax (the use 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 use 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 grown 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 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”) on a strongly bipartisan 69 – 27 vote. The Senate-passed MFA proposed to empower the states to require sellers not qualifying for a small seller exemption to collect and remit sales taxes on remote sales. In September 2013, House Judiciary Committee Chairman Robert Goodlatte (R-VA-6), an opponent of the Senate-passed bill, unveiled a series of principles to guide the development of legislation on this topic.

While the House Judiciary Committee held a hearing in March 2014 to explore Chairman Goodlatte’s principles in the context of “Alternative Solutions on the Internet Sales Tax Issue,” no legislation 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.


Since the 114th Congress convened in January, Chairman Goodlatte has held a number of meetings with stakeholders including NAW and our allies in the Marketplace Fairness Coalition (MFC) on whose Management Committee NAW serves, and promoted a “hybrid origin sourcing” approach to this issue. NAW opposes any origin sourcing-based model: because origin sourcing involves applying the sales tax in a remote sale based on the sales tax law of the location of the seller, the necessity of achieving parity at the point of sale/purchase is frustrated. As an alternative to the Goodlatte approach, Representative Chaffetz is continuing his effort to develop a bill that revises the MFA in ways that ease the burden of implementation on small remote sellers. The Chaffetz approach maintains the destination sourcing approach of the MFA (the sales tax applied in a remote sale is based on the sales tax law of the location of the purchaser) which ensures that parity at the point of sale/purchase and a level competitive playing field are in place for all sellers.

On March 10th, Senators Mike Enzi (R-WY), Richard Durbin (D-IL), Lamar Alexander (R-TN) and Heidi Heitkamp (D-ND) re-introduced the MFA (S 698) while acknowledging the need for the House to move a bill first in this Congress.

In a development that is both interesting and helpful to this effort, US Supreme Court Associate Justice Anthony Kennedy (who was a member of the Quill court and concurred in its opinion) recently wrote in his concurring opinion in Direct Marketing Association v. Brohl that Quill “is now inflicting extreme harm and unfairness on the States … with a concomitant unfairness to local retailers and their customers who do pay taxes at the register.” Justice Kennedy went on to call for reconsideration of the Supreme Court’s 1992 decision in the Quill case.