KPMG report - What internet / state sales tax collection bill would, would not do 

May 7:  The U.S. Senate last evening passed, 69 to 27, a bill that would authorize states, under certain conditions, to require remote sellers to collect and remit sales and use taxes on sales into the state.

S. 743 [PDF 210 KB], the Marketplace Fairness Act of 2013, now goes to the House. Although the bill could face greater opposition in the House than it faced in the Senate, some observers believe the prospects for final resolution of the issue may be far better than in the past.

The following discussion examines what some of the effects of the legislation would be, if enacted.


Under current U.S. Supreme Court jurisprudence, retailers and other sellers must have some sort of physical presence in a taxing jurisdiction before they can be required to collect and remit sales taxes. This physical presence requirement can be met if the remote seller has affiliates or third parties performing activities in the state that enable the retailer to establish and maintain a market in the state for sales.

The Marketplace Fairness Act of 2013 (S. 743) would remove this requirement—allowing states that undertake specified simplifications of the sales tax system to require sellers without physical presence to collect tax—thus creating a sweeping change in the U.S. sales and use tax landscape.

If enacted, the bill would authorize Streamlined Sales and Use Tax Agreement (SSUTA) member states and non-SSUTA states that enact certain simplifications to require remote sellers to collect tax.

In short, S. 743 would increase the sales and use tax compliance responsibilities for many remote sellers, as well as for sellers that currently collect sales taxes only in states where they have a physical presence, but make sales through various means into a larger number of states.

Who would be required to collect?

S. 743 defines “remote seller” as a person that makes remote sales (defined generally as one for which the seller does not have an obligation to collect tax under current rules) into the state.

For these purposes, “a person” includes an individual, partnership, corporation, LLC, or other legal entity, and a state or local government. Thus, if enacted, the legislation would require not only “pure” internet or remote sellers to collect, but would also require sellers (including business-to-business sellers) that now have a presence in several states to collect on all sales—provided they surpass the small-seller threshold.

Further, there is no requirement that the remote seller be based in the United States, or be located in a state that imposes a sales and use tax. Thus, a foreign (i.e., non-U.S.) remote seller or a seller located in a state that does not impose a sales and use tax would nevertheless be required to collect and remit sales tax on remote sales made to customers in the states that have the authority granted under the bill.

The bill also includes a small-seller exception. Only remote sellers with gross annual receipts from total U.S. remote sales in the preceding calendar year exceeding $1 million would be required to collect and remit. In determining whether the $1 million threshold is met, sales of all persons related to the seller within the meaning of IRC section 267(b), (c) and section 707(b)(1) would be aggregated. Certain other entities’ sales could also be aggregated if the relationships were established for the principal purpose of avoiding collecting sales tax.

SSUTA member states

Under the legislation, a SSUTA member state would exercise this authority beginning 180 days after giving notice of its intent to do so. This authority could not be exercised any earlier than the first day of the calendar quarter that is at least 180 days after the Marketplace Fairness Act of 2013 is enacted.

Non-SSUTA states

Beyond SSUTA member states, S. 743 also grants non-SSUTA states the authority to require remote sellers to collect and remit sales and use taxes on remote sales sourced to that state. For non-SSUTA states, destination-sourcing rules would apply, and a remote sale generally would be sourced to the location where the sold item is received by the purchaser, based on the delivery information.

The authority given to non-SSUTA states can only be exercised if the state has legislatively adopted and implemented certain minimum simplification requirements.

“State,” as defined in S. 743, includes the District of Columbia, Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, the Northern Mariana Islands, and any other territory or possession of the United States, as well as tribal governments.

A non-SSUTA state could not exercise the authority granted by the legislation until six months after the state implements the following simplification requirements:

  • Designate a single agency in the state responsible for all state and local sales tax administration, return processing, and audits for remote sales sourced to the state
  • Design a single return to be used by remote sellers for all state and local sales taxes and provide a single state and local audit for remote sellers
  • Adopt a uniform tax base for state and local taxes within a state
  • Adopt sourcing rules in accordance with the legislation or the SSUTA
  • Provide a taxability matrix describing the taxability of products and services and any exemptions from tax applicable to such products and services
  • Provide software available free of charge to remote sellers that (1) calculates the sales and use taxes due on each transaction at the time of the transaction, (2) files sales and use tax returns, and (3) is updated to reflect rate changes within a 90-day period
  • Adopt procedures for certifying "certified service providers", which are persons that provide software to remote sellers to facilitate state and local sales tax compliance.

Because the SSUTA has “hold-harmless provisions,” S. 743 also requires non-SSUTA states to relieve remote sellers from sales tax liability (including penalties and interest) associated with an error or omission made by a certified service provider, or as a result of incorrect information or software provided by the state.

Certified service providers are likewise relieved of liability associated with non-collection or incorrect collection if the liability is a result of misleading or inaccurate information being provided by a remote seller or incorrect information provided by the state.

What the bill does not do

As the focus on the Marketplace Fairness Act of 2013 intensifies, reports in the popular press have, at times, inaccurately implied that the legislation would impose new taxes on consumers.

No matter what side of the debate one might support, it is important to acknowledge that S. 743 would not impose new sales taxes. The bill would simply facilitate collection of taxes already owed by consumers that purchase products from sellers that are not currently required to collect sales tax.

Products and services that are currently subject to sales and use tax in a given state would not change under the bill, and any subsequent changes to the taxability of products and services in a state remain subject to the authority of the state legislature.

In addition, by its very terms, S. 743 cannot be construed to subject a remote seller to any state taxes other than sales and use taxes, nor would the bill act to confer nexus over a remote retailer.

The bill also would not affect intrastate sales and would not preempt the Mobile Telecommunications Sourcing Act.

For more information, contact a tax professional with KPMG’s State and Local Tax practice in Washington National Tax:

Harley Duncan

(202) 533-3254

©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.