As people increasingly shop online, the uncollected sales taxes leave billions of dollars out of the reach of state and local governments. We have recently seen the very public tiff between Amazon and the State of California over this issue. Traditional retailers continue to argue that it is simply unfair for online retailers not to pay the same sales taxes that they do. Many groups are now calling for a federal response to require the collection of sales tax by remote retailers. This week we review some history on this issue and the status of the latest federal legislation.
Quill v. North Dakota – The Nexus Rule
We start in 1992, when the U.S. Supreme Court in Quill v. North Dakota ruled on the matter of sales tax on remote sales. In Quill, the Tax Commissioner of North Dakota sought to require Quill, an out-of-state mail order house with neither outlets nor sales representatives in the state, to collect and pay a use tax on goods purchased for use in that state. The Supreme Court ruled that sales tax must be charged only if a retailer has a physical presence, or “nexus”, in the state where the purchase is used. 504 U.S. 298. The court held that it would be too complicated for retailers to parse through 45 state and more than 7,500 local tax systems in order to ascertain the appropriate sales tax charge. Some states, like California, are now claiming that affiliate programs run by those like Amazon establish such a nexus, in order for states to recover the uncollected sales taxes. Further, brick and mortar retailers argue that they operate at a competitive disadvantage to remote sellers who do not charge or collect sales tax and thus lose business to online retailers not tied to a particular state.
The Marketplace Fairness Act
Congress has responded to this increased pressure by introducing the Marketplace Fairness Act. S.1832. A similar bill was introduced in the House of Representatives called the Marketplace Equity Act of 2011 (H.R. 3179). The Marketplace Fairness Act (“Act”) was brought before the Senate on November 9, 2011. The Act requires that states simplify their sales tax laws in order to ease the concerns raised in the Quill case. The Act grants states the authority to compel online and catalog retailers to collect sales tax at the time of a transaction, subject to an exception for those businesses which do less than $500,000 in total U.S. remote sales. The sales tax would be attributed to the locality where the item is delivered to the purchaser. The caveat is that states are given this authority to compel the collection of sales tax from remote sellers only after they have simplified their sales tax laws. States may elect between two options in order to simplify their sales tax laws. One, a state can join the other 24 states that have already voluntarily adopted the measures of the Streamlined Sales and Use Tax Agreement. The Streamlined Sales and Use Tax Agreement requires member states to comply through the use of consistent sourcing rules, definitions, methods, and protocols for the calculation, collection and reporting of sales/use tax. California is currently not yet a member state of the SSUTA. Alternatively, states can adopt certain simplification mandates, such as designating a single state organization to handle sales tax registrations and establishing a uniform sales tax base for use throughout the state.
There are lobbyists both in favor of and against the bill’s passage. Those against the bill say that the additional sales tax on online purchases is a bad idea in a weak economy because it decreases consumer spending for groups with limited budgets. Also, online retailers like Ebay argue that it could stifle online commerce and destroy jobs, which in turn could decrease income taxes flowing to the state. Tod Cohen, eBay’s Vice President for Government Relations and Deputy General Counsel, stated “this is another Internet sales tax bill that fails to protect small business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors. It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.” Supporters argue that the additional revenue from collecting sales taxes from remote sales would help those states facing budget shortfalls. Further, they believe it would make it more fair for those retailers who operate out of a brick and mortar shop. Haley Barbour, the governor of Mississippi has said “good public policy says it is past time that our brick and mortar merchants on Main Street and in our shopping centers get a level playing field with Amazon and the internet-that they get fair treatment for paying our taxes.” Mr. Barbour further commented that the passage of the bill would allow Mississippi to collect an estimated $300 million in currently uncollected sales taxes. As of the date of this article, the Act has been referred to the Finance Committee, so the debate will continue for the time being.
The outcome of this legislation is important for Californians. On the one hand, according to the University of Tennessee Center for Business and Economic Research, 18% of California’s $23 billion deficit could be closed if online retailers collected sales tax for sales attributable to California. On the other hand, there is a fear that the state could be hampered by the requirement to streamline their sales taxes and it could negatively affect small businesses in California and reduce job growth.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben & Junius, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.
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