United States: Fair Is Fair: The Marketplace Equity And Fairness Facts, And The $23 Billion Issues

The Issue

Chances are, you know someone who purchased something online today, or at least within the last few months. And, unless the online or electronic retailer (e-tailer) from whom you made the purchase has some physical presence in your state (or your state has no sales tax),¹ the purchaser probably did not pay state sales tax on that purchase or even think to record the price of the merchandise for purposes of self-reporting and paying a use tax.

Use tax? What is a use tax? A use tax is an ad valorem (i.e., according to value) tax on the use, consumption or storage of tangible personal property or merchandise, which is often payable when a consumer orders merchandise from an out-of-state retailer; a use tax is usually at a rate comparable to the applicable sales tax.² Many people shop online precisely because they do not think they have to pay taxes (although they do), and may consider the tax due on their individual purchase to be insignificant; but, when combined with all e-tail sales, nothing could be further from the truth. In 2011, e-commerce represented 16.1% of all retail sales.³ During 2011, online sales grew 16.1% while traditional retail sales grew only 4.7%.⁴

Brick and mortar retailers must not only collect and remit sales taxes for the merchandise they sell, but also bear the ignominy of being the showrooms for the e-tailers that do not collect and remit sales taxes. The harm suffered extends well beyond the traditional retailer. In a time of growing budget deficits for a majority of states, many essential services (e.g., police departments, public schools, fire departments, courts) are all experiencing funding cuts. In 2012 alone, it is estimated that states will lose as much as $23 billion in uncollected sales tax revenue because e-tailers are not collecting and remitting sales taxes.⁵

Understanding how we reached this point is important to recognizing the necessity for, and availability of, the solution.

The Past

In 1992, three years before Amazon.com was founded, the United States Supreme Court issued an opinion in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Quill was a retailer that sold office equipment and supplies. Quill's annual sales exceeded $200 million, and its sales to roughly 3,000 customers in North Dakota totaled approximately $1 million. All of Quill's merchandise sold to North Dakota businesses or residents was delivered by mail or common carrier from locations outside North Dakota. The dispute between Quill and the state of North Dakota involved whether Quill could be compelled to collect North Dakota's sales tax and remit it to the state.

Although the Supreme Court held that while the due process clause did not bar enforcement of the use tax against Quill, such enforcement did violate the commerce clause. The Quill court found that vendors whose only connection with customers in the taxing state by common carriers or the United States Mail are exempt from state-imposed duties to collect sales and use taxes. See Quill Corp., 504 U.S. at 315. However, the Quill majority recognized two important principles. First, "with certain restrictions, interstate commerce may be required to pay its fair share of state taxes." D. H. Holmes Co. v. McNamara, 486 U.S. 24, 31 (1988); see also Commonwealth Edison Co. v. Montana, 453 U.S. 609, 623–624 (1981) ("It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of [the] state tax burden even though it increases the cost of doing business") (internal quotation marks and citation omitted)." Quill Corp., 504 U.S. at 310, n.5. Second, the Quill majority noted that "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes." Quill Corp., 504 U.S. at 318. Unfortunately, the Supreme Court's invitation to Congress produced little in the way of immediate federal progress.

The Present

Some ten years after Quill, progress was made—but not by Congress. A multi-state compact known as the Streamlined Sales and Use Tax Agreement (the "SSUTA") was adopted in 2002. The SSUTA simplifies and modernizes sales and use tax administration in order to substantially reduce the burden of tax compliance; however, the SSUTA is not federal legislation. Participation in the SSUTA is voluntary, and only 24 states are presently members of the SSUTA.

In October 2003, S. 1736, the Streamlined Sale and Use Tax Act was introduced in the Senate; however, the SSUTA never made its way out of the Senate chamber. Eight years later, H.R. 3179, the Marketplace Equity Act was introduced in the House by Representative Steve Womack (R-AR) and S. 1832 (the Marketplace Fairness Act) was introduced in the Senate by Senator Michael Enzi (R-WY). (Collectively, they are known as the "Marketplace Acts.") Unlike many bills in Congress, the Marketplace Acts enjoy bipartisan support.⁶

Under the Marketplace Acts, states will have the right to collect sales and use taxes under either the SSUTA, or under the minimum simplification requirements provided for by the Marketplace Acts. In other words, there is no "one size fits all" solution imposed on the states. Rather, the Marketplace Acts recognize the importance of states fashioning their own best solution to collect the sales and use taxes from e-tailers, relieving consumers of the obligation to calculate and remit those taxes. To minimize any impact on small businesses, the Marketplace Acts also provide for a small business exemption of $1 million in the United States or $100,000 in the state (under H.R. 3179), or $500,000 in the United States (under S. 1832). Finally, there are no real technological barriers associated with the calculation and collection functions for e-tailers under either of the Marketplace Acts. Indeed, what is effectively "off-the-shelf" software for this purpose already exists.

Contrary to what many people may believe, neither of the Marketplace Acts "taxes" the Internet nor does it create a new tax. The Internet Tax Freedom Act (the "ITFA"), enacted in October 1998, created a moratorium on taxes relating to access to the Internet as well as to any new, multiple or discriminatory taxes on the Internet.⁷ The ITFA did not, in 1998 nor does it now, exempt Internet purchases from state sales taxes. Indeed, the ITFA specifically preserved the taxing authority of state and local governments.⁸ Ultimately, the Marketplace Acts are designed to end what has effectively been a subsidy for e-tailers; to relieve consumers from the burdens of sales or use tax self-reporting and remittance; and to allow each state to exercise its right to determine the proper means to level the playing field for all retail merchants, no matter where they or their customers may be located.

The Future

Some say that the past is prologue. Justice Byron Raymond "Whizzer" White, who dissented in Quill, presciently noted that "an out-of-state seller in a neighboring State could be the dominant business in the putative taxing State, creating the greatest infrastructure burdens and undercutting the State's home companies by its comparative price advantage in selling products free of use taxes, and yet not have to collect such taxes if it lacks a physical presence in the taxing State." Quill Corp., 504 U.S. at 328 – 329. While the stakes in Quill were decidedly smaller, the $23 billion in uncollected sales and use tax revenue cannot be ignored. Few can predict the effect of election politics on pending legislation, but the bipartisan support that H.R. 3170 and S. 1832 enjoy offers some hope that the 112th Congress (or a successor) will pass the Marketplace Acts because, after all, fair is fair.

Originally published in Shopping Center Legal Update

Footnotes

1 Alaska, Delaware, Montana, New Hampshire and Oregon have no state sales tax.

2 By way of example, California's Board of Equalization form BOE-401-DS specifies that the use tax rate for a resident of the City of Los Angeles is 8.75%.

3 U.S. Census Bureau, GAFO (general merchandise, apparel, furniture and office supplies) sales.

4 Id.

5 "State and Local Tax Revenue Losses from E-Commerce Estimates as of April 2009" by Drs. Donald Bruce and William Fox, Center for Business and Economic Research, University of Tennessee, and the National Conference of State Legislatures.

6 As of June 2012, H.R. 3179 has 46 co-sponsors (23 Republicans and 23 Democrats) and S. 1832 has 13 co-sponsors (four Republicans and nine Democrats).

7 Despite the breadth and scope of the ITFA, it was enacted as part of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999. The text of the ITFA thus appears as an annotation to 47 U.S.C. § 151, which created the Federal Communications Commission.

8 Section 1101(b) of the ITFA reads: "Preservation of State and Local Taxing Authority. - Except as provided in this section, nothing in this title shall be construed to modify, impair, or supersede, or authorize the modification, impairment, or superseding of, any State or local law pertaining to taxation that is otherwise permissible by or under the Constitution of the United States or other Federal law and in effect on the date of enactment of this Act."

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