When sales tax laws first came into existence in the early to mid-part of the 20th century, the vast majority of sales were made from brick-and-mortar stores to local customers. However, with the rise of the internet and the increasing reach of ecommerce into every corner of the market, a number of new challenges have become apparent.
States that depended on sales tax revenue to fund a wide variety of services and programs have suddenly found that cash flow decreasing rapidly. There has been movement on several fronts over the past decade or so to try and expand the authority for states to collect sales tax on purchases made by remote sellers, and the Marketplace Fairness Act of 2017 is the latest manifestation of this.
The Marketplace Fairness Act of 2013
This is not the first Marketplace Fairness Act, however. In fact, a bill by the same name passed the Senate with 69 votes in May of 2013. It then went to the house, where it stalled and was eventually shelved due to opposition from several groups, including small business organizations, the National Taxpayers Union, the American Catalog Mailers Association, and the handful of states that don’t impose a sales tax.
In April of 2017, two new bills were introduced, one in the House and one in the Senate. The Senate bill was the Marketplace Fairness Act of 2017, and it was sponsored by Senators Mike Enzi, Republican of Wyoming, Dick Durban, Democrat of Illinois, Lamar Alexander, Republican of Tennessee, and Heidi Heitkamp, Democrat of North Dakota.
Under this bill, states would have the authority to compel out-of-state retailers to collect and remit sales tax on purchases made by in-state customers, provided that:
- The states simplified their sales tax laws and processes by joining the Streamlined Sales and Use Tax Agreement, and
- The seller had more than $1 million in total sales to customers in the US annually.
On the same day that this bill was unveiled in the Senate, a bi-partisan group of representatives introduced the Remote Transactions Parity Act in the house, which resembles the Senate legislation broadly, but with a major exception being the definition of a "small seller". The House bill sets the threshold for exemption from responsibility for sales tax collection at $10 million in total nationwide sales for the first year, $4 million for the second year, $1 million for the third year, and then eliminates it from the fourth year on.
There will have to be some reconciliation between these two versions before they actually become law, but if they do pass both houses of Congress, it’s likely they will keep the basic framework laid out in both current bills.
Streamlined Sales and Use Tax Agreement
One important aspect of the Marketplace Fairness Act is the stipulation that states only qualify to compel remote sellers to collect and remit sales tax if they have joined in the Streamlined Sales and Use Tax Agreement (SSUTA). This is an outgrowth of the Streamlined Sales Tax Project (SSTP), which was first put together in early 2000. SSTP, as an organization, arose out of the Supreme Court decision in the 1992 case of Quill Corp v North Dakota, which stated in part that states could not compel out-of-state sellers to collect and remit sales tax because the myriad state and local rates and regulations made it too complicated to be practical.
The SSUTA applies to four specific areas relating to state and local sales tax codes. These are:
- State-level Administration – a single return for each state is all that’s required, rather than the multiple returns previously required in situations where local jurisdictions were not administered by the state.
- Uniform Tax Base – the same goods and services are taxed in all jurisdictions within a given state. Each individual state can still determine independently what to tax.
- Simplified Tax Rates – uniform tax rates across all jurisdictions within a state.
- Uniform Sales Sourcing Rules – for remote sellers, all applicable rates would be determined by the final destination of the goods.
There are currently 24 states that are party to the SSUTA, along with Washington, D.C. Sellers registering through the SSUTA to collect and remit sales tax will receive permits to do so in every member state, which significantly streamlines that part of the process as well.
Benefits of the Marketplace Fairness Act
With the SSUTA in place, a major hurdle to the ability of the Federal government to regulate the collection and remittance of state sales taxes by remote sellers is removed. That dynamic not only benefits states, who hope to see their sales tax revenue increase, but also traditional brick-and-mortar stores. These establishments were always subject to state sales tax laws, and they were having an increasingly difficult time competing with remote sellers who did not have to add sales tax onto the purchase price of an item.
While the expansion of online sales in particular has broadened the economy in important ways, those traditional physical stores are also essential to a healthy and thriving local economy in communities across the country, and this is one of the main arguments being used to push the Marketplace Fairness Act as well as the Remote Transactions Parity Act as they are debated in Congress.