Marketplace Fairness Act & The Remote Transactions Parity Act

What is Marketplace Fairness?

Two U.S. Supreme Court decisions of the previous century (before the internet existed) established federal law with respect to remote sales tax collection as we know it today – the 1967 National Bellas Hess v. Department of Revenue of Illinois case and the 1992 Quill Corp. v. North Dakota.  In the first case, the Illinois Department of Revenue attempted to force catalog retailer Bellas Hess, which was based in Kansas City, to collect Illinois sales tax. Bellas Hess refused.  In its ruling on the case, the Supreme Court said that only businesses with nexus in a state have to collect sales tax for that state.  Nexus is created by a physical presence.  The Bellas Hess decision was reaffirmed in 1992 when North Dakota tried to require Quill Corporation, a mail-order office supply company incorporated in Delaware, to collect tax on its sales into the state. Quill refused on the grounds that it had no physical operations or employees in North Dakota.  However, in the Quill ruling, the Supreme Court specifically invited Congress to exercise its authority to overrule the Supreme Court by enacting legislation:

“Our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve . . . In this situation, it may be that the better part of both wisdom and valor is to respect the judgment of the other branches of the Government.”

However, remote sales have changed dramatically since that time through the advent of Ecommerce, and federal law has not kept pace.  The absence of an update has left brick and mortar retailers (local businesses) at a 6-10 percent price disadvantage to online retailers and state and local governments at a $23 billion per year loss in unpaid taxes on remote sales. 

Responding to the Supreme Court’s invitation for Congress to utilize its authority to regulate interstate commerce and modernize our tax laws, the Marketplace Fairness Act would allow those states interested in collecting taxes from online retailers to either: (1) join the Streamlined Sales and Use Tax Agreement (SSUTA), a compact between 24 states to use simplified state-level administration of sales and use taxes and uniformity in state and local tax bases and definitions, or (2) agree to implement minimum tax simplification requirements as outlined in the bill.  

The argument that the Marketplace Fairness Act would permit new taxing authority to state and local governments distorts the facts with respect to current state laws and federal law as established under the Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). That decision holds that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.However in states that impose a sales tax (45 states and the District of Columbia), online buyers are already required to pay a use tax for items upon which no sales tax has been paid; though sellers do not always apply this tax and most buyers are not aware of their obligation to remit it.

Opponents of the Marketplace Fairness Act also argue that even if technology can resolve the technical concerns of keeping track of rates, jurisdictions, and filing complexities, such software would be prohibitively costly, particularly for small businesses.However the legislation actually requires states to provide the necessary software to retailers free of charge.And business has been very involved in simplifying the sales tax systems across the country to make it easier to comply.

Opponents of the Marketplace Fairness Act also argue that even if technology can resolve the technical concerns of keeping track of rates, jurisdictions, and filing complexities, such software would be prohibitively costly, particularly for small businesses.However the legislation actually requires states to provide the necessary software to retailers free of charge.And business has been very involved in simplifying the sales tax systems across the country to make it easier to comply.

Current Issue

In the 114th Congress, several remote sales tax bills were introduced and there were several attempts to advance the proposals. In March 2015, a bipartisan group of Senators – Sens. Enzi (R-WY), Alexander (R-TN), Durbin (D-IL) and Heitkamp (D-ND) – introduced S.698, the Marketplace Fairness Act of 2015 (MFA). The bill was essentially the same that was passed by the Senate with large bipartisan support in 2013. In June 2015, in the House of Representatives, Reps. Jason Chaffetz (R-UT-3), House Judiciary Committee Ranking Member John Conyers (D-MI-13), and a bi-partisan group of legislators introduced H.R. 2775, the Remote Transactions Parity Act (RTPA). Both bills would compel retailers to collect taxes on remote sales based on the location of the consumer – also known as destination-based sourcing. The state in which the consumer resides could compel out-of-state retailers to collect remote sales taxes, either as a member of the Streamlined Sales Tax Governing Board or through the use of certified software providers.

Why is this legislation necessary?

Consumer failure to pay online sales and use taxes as a result of federal inaction on this issue annually results in the loss of billions of dollars per year in taxes owed to state and local governments on remote sales. For example, according to the Department of Commerce, e-commerce sales in 2005 were $87 billion, and grew to $341.7 billion in 2015. Due to this exponential growth, it is estimated that state and local governments fail to collect more than $23 billion annually on remote transactions.

Passing MFA or RTPA would finally bring federal law into the digital age by enabling state and local governments to collect sales taxes on online purchases that are already owed to them but are not being paid. Further, modernizing tax law to reflect the impact of e-commerce sales will level the playing field for brick and mortar retailers who are currently at a five to ten percent competitive disadvantage to remote sellers.