- June 2016
Twenty four years ago in Quill v. North Dakota, the U.S. Supreme Court ruled that the lack of a physical presence (“substantial nexus”) in a State by an out-of-state seller 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. 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 Quill, the volume of e-commerce has exploded and continues to grow principally as a result of online sales via the internet. According to the 2013 NAW Institute for Distribution Excellence/IBM Facing the Forces study, 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%. The evolution of this marketplace dynamic places “brick and mortar” sellers which must collect and remit state sales taxes at a clear price-generated disadvantage with their remote online competitors.
This issue has been the subject of Congressional attention for several years. Most recently, during the 113th (2013-14) Congress, the Senate passed the Marketplace Fairness Act (“MFA”) by a vote of 69 – 27, but the measure was never taken up by the House. The release of principles to guide the development of legislation to address this issue by the House Judiciary Committee Chairman, Rep. Robert Goodlatte (R-VA-6), did not result in the introduction of a bill, and an effort led by Rep. Jason Chaffetz (R-UT-3) to include a modified version of the MFA in a broad session-ending legislative package came up short.
During the First Session of the current 114th Congress, 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 that the House would need to act first on this issue. In the House, Chairman Goodlatte has promoted an alternative approach, one that is based on “hybrid origin sourcing.” NAW opposes any approach that includes an origin component because the necessity of achieving parity at the point of purchase is frustrated. Congressman Chaffetz has introduced HR 2775, the Remote Transactions Parity Act (“RTPA”). RTPA is a bipartisan bill that 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 parity at the point of purchase, and that a level competitive playing field is in place for all sellers.
As the 114th Congress’ first session drew to a close, an effort to package an MFA/RTPA-like approach to the sales tax parity issue, with a House-passed bill making permanent the current federally-mandated exclusion of internet access to state taxation (HR 235, Permanent Internet Tax Freedom Act, or “PITFA”) to be included in a larger session-ending legislative package, was unsuccessful. The legislative effort to find a path forward continues.