On May 6, 2013, the United States Senate passed the Marketplace Fairness Act of 2013 (the "Act") by a vote of 69 to 27. The legislation (S. 743) now moves to the House of Representatives for consideration.
Under the Act, certain remote sellers of goods and services (e.g., Internet sellers, catalog sellers and other sellers without physical presence in the taxing state) would lose the protection afforded by the Commerce Clause's physical presence requirement as set forth in Quill v. North Dakota, 504 U.S. 298 (1992), when objecting to a state's ability to impose upon sellers a sales/use tax collection obligation. However, such remote sellers would still retain the protection of the Due Process Clause, which continues to require some "minimum connection" between the state and both the seller and the transaction the state seeks to tax. Remote sellers would also continue to be protected by the Equal Protection Clause, as it generally requires reasonableness in the application of the tax law.
Pursuant to the Act, states would be authorized to require remote sellers to collect and remit state sales and use taxes (1) if the state imposing the tax meets certain stated requirements and (2) "if the remote seller has gross annual receipts in total remote sales in the United States in the preceding calendar year exceeding $1,000,000." (It is important to note that for some related sellers, this $1,000,000 is an aggregated amount.) In essence, for a state to obtain the benefits of the Act, it must either be a member of the Streamlined Sales and Use Tax Agreement ("SSUTA") or it must adopt and implement the minimum simplification requirements stated in the Act. The minimum requirements imposed upon the states include requirements that the state provide: a single sales and use tax return; a single entity within the state responsible for all state and local sales and use tax administration, return processing and audits for remote sales sourced to the state; a uniform sales and use tax base; and free software designed to, among other things, calculate sales and use taxes due on each transaction at the time the transaction is completed. Once a state qualifies under the Act, it is authorized to require a remote seller (other than a remote seller that does not meet the $1,000,000 test or has some other constitutional or statutory defense) to collect and remit sales and use taxes with respect to remote sales sourced to that state.
Under the Act, remote sales will be sourced to "the location where the product or service sold is received by the purchaser, based on the location indicated by instructions for delivery that the purchaser furnishes to the seller," with alternate rules provided in the event no delivery location is specified. SSUTA member states "shall comply with the sourcing provisions of the Streamlined Sales and Use Tax Agreement."
The Act does not apply to any other state tax or to any state regulation, but deals only with state sales and use tax. The Act also states that it "shall not be construed to create any nexus or alter the standards for determining nexus between a person and a State or locality." However, it changes the Commerce Clause nexus standard by its very existence. The Act further states that "[t]he provisions of this Act shall apply only to remote sales and shall not apply to intrastate sales or intrastate sourcing rules." Moreover, the Act clarifies that it shall not be "construed as altering in any manner or preempting the Mobile Telecommunications Sourcing Act (4 U.S.C. 116–126)."
One of the immediately apparent concerns arising under the Act relates to the minimum simplification requirements that non-SSUTA states must meet in order to become authorized to impose the Act's tax-collection responsibility. In essence, for non-SSUTA states, an issue arises regarding who will be the ultimate arbiter of whether the states are in compliance with the Act's requirements. Without a governing entity, like the SSUTA, and short of costly litigation, how will states be held accountable for deviations from the Act once the state’s implementing legislation has been passed?
Another potential issue with the Act relates to the small remote seller exemption, which applies only if the seller does not reach $1,000,000 in sales for all states in the aggregate. This means that a seller with $1,000,000 in sales in New York and $2,000 in sales in Illinois would not qualify as a small seller in Illinois and, thus, could be required to collect and remit sales/use tax in Illinois, despite the fact that such tax liability would amount to only $125 per year. In cases such as this, the burden imposed by the administrative cost of complying with the Act is likely to far outweigh the negligible benefit to the tax-collecting state.
For Further Information
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