The debate has heated up in recent years due to states’ attempts to expand the definition of what kinds of business activities and connections constitute ‘nexus’ (the requirement under the US constitution that taxpayers have a sufficient connection or link to a state, to give the state authority to impose tax or a collection or filing responsibility).
As online retailers have expanded their share of the retail market, states have a sense that there is significant revenue that is going un-taxed – and shallow state coffers want their share of the revenue.
States’ abilities to require remote sellers to collect sales and use tax are limited by the physical presence requirement set forth in Quill Corp. v. North Dakota. This is a 1992 US Supreme Court decision that examined whether a state could require an out-of-state seller, whose only activity in the state was soliciting sales, to collect use tax on the sales it made to in-state customers.
As a result of the growth in online sales, states are calling for the end of Quill’s physical presence requirement through a federal legislative solution. Under the powers granted to it in the Commerce Clause, Congress can decide when and to what extent states can burden interstate commerce and require sellers not physically located within their borders to collect and remit tax.
The Streamlined Sales and Use Tax Agreement (SSUTA) has brought together 24 states to adopt uniform definitions and adhere to streamlined sales and use tax administrative procedures, in exchange for remote sellers’ voluntary collection and remittance of tax. But many argue that the SSUTA’s impact is limited given that none of the ’big’ states (e.g. California, Illinois, New York, and Texas) are members.
Every year since 2001, legislation has been proposed in Congress to get rid of Quill and allow states to require remote sellers to collect and remit sales and use tax but generally the bills have not progressed. In a recent session, Congress considered three bills: Marketplace Fairness Act (S. 1832), Marketplace Equity Act (H.R. 3179) and Main Street Fairness Act (S. 1452). The bills, while similar in purpose, differ regarding an exemption for small businesses, required membership in the SSUTA, vendor compensation and telecommunications taxes.
The matter has received recent attention in the popular press and there is a sense that the legislation is closer to passing in Congress than ever before. In an effort to move the issue forward by the end of the year, the Marketplace Fairness Act (S. 1832) was added as an amendment to a small-business jobs bill in July 2012 and a hearing was held in a Senate subcommittee in August 2012. Similarly, the Marketplace Equity Act was heard in a full committee in July 2012. All the bills are still pending in their houses of origination, and any new developments will continue to be monitored closely.