Legal Matters: Proposed Marketplace Fairness Act Threatens Direct Marketers
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 Amazon.com, 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.
In addition, this newest effort to expand state tax authority differs in substance from prior bills. Whereas most of the previous bills would have benefited only those states that adopted legislation conforming their tax codes to the so-called Streamlined Sales and Use Tax Agreement, the current legislative proposal has no such limitation. Consequently, if the bill passes it would force any retailer with more than $500,000 of annual sales nationwide to collect sales taxes in more than 8,000 state and local tax jurisdictions.
The Marketplace Fairness Act does nothing to standardize the tax systems and expenses among the various states for small and midsized retailers.
Showdown is Inevitable
Large shopping center retailers don’t even try to make the claim that the Marketplace Fairness Act would lessen the burden of tax collection. Instead, their primary argument is that all sellers should bear the burden equally as a matter of fairness. However, the argument that current nexus standards result in an “uneven playing field” is based on a false premise. Bigger retailers receive numerous state and local tax benefits and other incentives to locate stores in states and communities. These include rebates of property tax, subsidies for utility lines, tax deductions for new hires, etc. On the other hand, remote sellers receive none of these government benefits. Yet they’d be burdened with collection of the tax to fund such government subsidies.
The battle lines are being tightly drawn. While national retail chains and even Amazon favor the Marketplace Fairness Act, many small online retailers believe that such legislation would cripple their businesses. They argue that the internet is an incubator for startup companies and enables small businesses access to a national market for their goods and services. Small and midsized cross-channel retailers maintain that a new federal law, effectively reversing Supreme Court precedent and expanding state taxation authority over internet transactions, will harm e-commerce, which is vital to the nation’s economic recovery.
In response to proposals for expanded state taxing authority over remote sellers, resolutions have been introduced in the both the Senate and House in opposition to such federal legislation. The Senate Resolution (S. Res. 309) includes the following language:
The free Internet marketplace has enabled a large number of small retailers and entrepreneurs across the Nation to establish and strengthen businesses on various e-commerce platforms and therefore protect and create jobs, increase consumer choice, create competition in the retail industry, and provide quality goods and services at reasonable and often discounted prices; Any Federal legislation that would upset the free and fair Internet marketplace and allow State governments to impose new, onerous and burdensome sales tax-collecting schemes on out-of-state, Internet-enabled small businesses would adversely impact hundreds of thousands of jobs, reduce consumer choice, and impede the growth and development of interstate commerce; and At a time when national unemployment numbers are high and businesses across the country are struggling to keep their doors open, the Federal Government should promote pro-growth and pro-business policies instead of enacting legislation that extracts additional taxes from our Nation’s Internet-enabled businesses.
In an election year with so much talk in Washington about simplifying the federal tax code, there’s good reason to question why Congress should pass a law that will massively complicate tax obligations for tens of thousands of small and midsized businesses and millions of consumers.