Legal Matters : Proposed Marketplace Fairness Act Threatens Direct Marketers

Bill would complicate tax obligations for thousands of small and midsized remote sellers and millions of consumers

On Nov. 9, 2011, a group of 10 senators from both sides of the aisle introduced the Marketplace Fairness Act, S.1832. On Oct. 13, 2011, a similar bipartisan bill was introduced in the House of Representatives called the Marketplace Equity Act.

For more than a quarter century, states have tried to convince Congress to enact legislation that would strip direct marketers of their constitutional protection from having to collect state sales taxes when delivering products to consumers in states where they have no physical presence such as retail stores, warehouses or salesmen. In landmark decisions in 1967 and again in 1992, the Supreme Court ruled that absent such an in-state physical presence — the Court referred to it as “nexus” — it would be unfair to require out-of-state retailers to collect taxes for state and local governments that provide no services to those companies in return.

The justices were especially concerned with the burdens involved in collecting taxes on behalf of thousands of sales tax jurisdictions with varying rates and requirements. However, the Supreme Court concluded in its famous 1992 Quill vs. North Dakota decision that if Congress chose to do so, it could grant the states new and expanded taxation authority over remote sellers. Since that ruling numerous bills have been introduced that would impose tax collection obligations on catalog companies and electronic merchants. None have passed, however, primarily because the proposals failed to include sufficient simplification and uniformity measures to address the disparate and confusing features of state and local sales taxes.

Momentum Builds for ‘Fairness’ Act
So what’s different this time around in Washington? The misnamed Marketplace Fairness Act is being promoted by big-box retailers, led by Wal-Mart, under a coalition calling itself the Alliance for Main Street Fairness. This movement is mounting a well-funded lobbying campaign. Moreover, a representative of Amazon.com, which has been on the receiving end of audits by aggressive state tax administrators, recently testified before the House Judiciary Committee in support of the legislation. In other words, the players and politics surrounding the current legislative proposal are markedly different than in prior years.

In addition, this newest effort to expand state tax authority differs in substance from prior bills. Whereas most of the previous bills would have benefited only those states that adopted legislation conforming their tax codes to the so-called Streamlined Sales and Use Tax Agreement, the current legislative proposal has no such limitation. Consequently, if the bill passes it would force any retailer with more than $500,000 of annual sales nationwide to collect sales taxes in more than 8,000 state and local tax jurisdictions.

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