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, 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.

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  • S W

    Technology today can calculate shipping costs in seconds for almost any location in the world. Ebay, Overstock and many others including NetChoice all maintain that multi-jurisdictional interstate sales tax calculation is too difficult, however all maintain vast computer infrastructures capable of keeping track of millions of global transactions including commissions, cost of goods, and even incredibly complicated Value Added Taxes, Provincial Taxes and many other taxes and fees across many different country borders. I assure you sales tax calculation, collection and remittance for online sales tax legally due is easily accomplished.

    The Main Street Fairness Act will assist many businesses of all sizes to realize unknown profits making them more competitive. The online component of my business is in its infancy. After examining possible avenues of growth I was immediately confronted by the tremendous burden of tax collection and remittance in my own state as well neighboring states. I said to myself, "there has to be a better way!" So I turned to the Internet.

    There is a simple solution: TaxCloud.

    The statements by large Internet merchants and others continue to confuse me. My company now utilizes a PayPal checkout button seamlessly integrated with TaxCloud. Now my business is enabled to calculate, collect and remit sales tax for any jurisdiction in any state. It is simpler in most cases for my business to calculate and remit sales tax than to deal with shipping. If my business can manage to collect legally due sales tax simplifying my customer’s lives, why is it so hard for Ebay, Overstock and their affiliates as NetChoice claims?

    Technology available freely on the Internet (like TaxCloud) is more than capable of seamlessly handling sales tax calculation and remittance. Sorry everyone, the "too burdensome" argument carried merit in 1967 and in 1992 (when SCOTUS last ruled on this matter), but in the era of modern computing where Ebay maintains a dominant position, multi-jurisdictional sales tax calculation and remittance is easily accomplished

    So what is the real reason Ebay and other companies choose to evade supporting our schools, hospitals, infrastructure, libraries, public parks and so much more by refusing to easily collect and remit sales tax legally due?

    It is clear that the real burden of sales tax falls upon the consumer, and there is no burden to business of any size. Any business can easily calculate, collect and remit sales tax legally due utilizing modern technology while simultaneously realizing greater efficiencies and profit. Consumers truly benefit by eliminating the burden of having to track and remit sales tax due on Internet purchases.

    Federal legislation enables states rights to collect sales tax legally due while maintaining states individual rights to tax independently. Remember the Boston Tea Party. Origin based sales tax fails to maintain state’s Constitutional autonomous taxing authority.

    Unrealized to most consumers are the true costs of permitting and embracing the illegal practice of tax evasion. This year Connecticut enacted the largest tax increase in it’s history. The increase included eliminating clothing exemptions, raising the sales tax rate %.35, %1 on all luxury goods over $1000 and tax on alcohol went up %20. CT is not alone. West Virginia now taxes groceries to make up for lost sales tax revenues resulting from increasing convenience of online shopping. Rhode Island as well as doubled, that’s right a %100 increase, on all park entry and parking fees. Property taxes in states such as NY have increasing at an alarming rate to maintain funding primarily for education.

    Lower income wage earners are actually the hardest hit. Without the means and available credit to participate in online sales their only option is to shop locally paying increased sales tax rates, such as in CT, paying the tax bill for those who selfishly continue to evade their tax obligations. More interesting is the fact that for every million dollars in sales a brick and mortar company provides 3.8 jobs, while large online merchants provide only .8 jobs for the same amount of sales. Tax policies are not created or imposed to provide segregation of businesses. The passage of Federal legislation will level the playing field benefitting many businesses and workers in every state.

    Sales tax is a fair and impartial tax billed directly to the consumer and in no way harms businesses when applied fairly and equally. Mall vacancy rates are now over %20 nationally and increasing as more brick and mortar stores continue to close their doors. As more stores close jobs are lost, homes are lost and…. you get the picture. The real burden is now upon the millions of small businesses who provide many more jobs and opportunities to find ways to compete with the large Internet retailers.

    The real burden today is upon the consumer and the many small to medium d businesses being

  • S W

    Part 2:

    The real burden today is upon the consumer and the many small to medium d businesses being consumed by misinformation. I discovered that by progressively employing modern technology my small start up business is now able to compete in any state without fear of nexus laws or affiliate relationships, and is more efficient and profitable. Federal Legislation will enable states rights to collect sales tax legally due providing much needed revenue, create and save many jobs, and most importantly permit states to eliminate other harmful taxing methods while simultaneously removing the many burdens confronting businesses today.

    I applaud Amazon for their integrity publicly supporting the Federal Legislation and strongly urge Congress to pass the Marketplace Fairness Act.

  • David Campbell

    @SW – wow. but how do you really feel? I agree completely that technology makes this a non-issue, and absent action by Congress more and more retailers will migrate to primarily online operations.

    To provide an analogy… if Congress were to say that anyone driving red cars would not have to obey speed limits, you would rapidly see everyone buying red cars, and entire industries would develop to paint cars red.

    Come on Congress – protect our local retailers and fix this out-of-date loophole for mega retailers.

  • Bill

    Why shouldn’t these remote retailers collect sales tax from thier customers while local retailers selling the exact same product must charge sales tax?

    It is a bit out-dated to suggest computers can’t manage the "challenge" of keeping track of all of the rates and possible exemptions. A brief Google search yields dozens of software systems that do exactly that – and one of them (taxcloud) is even free.

    Certainly Mr. Isaacson, general counsel for L.L.Bean (a major beneficiary of this loophole), is sophisticated enough to know his argument ignores the many advances in technology since the 1967 Bellas Hess ruling.