United States: U.S. Senate Approves Marketplace Fairness Act That Would Allow States To Impose Sales Tax Collection Requirements On Remote Sellers

On Monday, May 6, by a vote of 69-27, the U.S. Senate passed the Marketplace Fairness Act of 2013 (MFA), which would allow states to require remote (out-of-state) sellers to collect and remit sales and use tax on sales to in-state residents even if the retailer has no physical presence in the state.1 Under the MFA, a member state of the Streamlined Sales and Use Tax Agreement (SSUTA) would be able to require the collection of tax beginning 180 days after it publishes notice of its intent to exercise its authority.2 In order for states that currently are not members of the SSUTA to secure collection and remittance authorization, such states would need to adopt and implement several minimum sales tax simplification requirements. The MFA would exempt remote sellers with $1 million or less in annual sales, and would require that an adopting state provide free software to remote sellers to calculate and file sales and use tax returns.


States are continuing to enact click-through or affiliate sales and use tax nexus legislation to require certain remote sellers (i.e., Internet vendors) to collect tax on their sales to instate residents.3 While this trend continues, it is unclear whether such state-specific legislation violates the Commerce Clause of the U.S. Constitution. In 1992, the U.S. Supreme Court held that whether a state can require a person or entity lacking a physical presence within its borders to collect that state's sales and use tax is an issue that "Congress has the ultimate power to resolve" based on its authority to regulate interstate commerce under the Commerce Clause.4 As a result, retailers, consumers and states are awaiting congressional action to settle the matter.

In 2011, members in both chambers of Congress introduced three different bills5 that would have addressed the sales tax nexus issue by allowing states that met certain simplification requirements to impose sales and use tax collection requirements upon remote sellers. Last year, of the three bills, the Senate's Marketplace Fairness Act had gained the most momentum given its applicability to both member states of the SSUTA6 and non-member states, and its detailed list of simplification requirements. Thus, while the 112th Congress adjourned without enacting any of the bills, members in both the House and Senate introduced a new version of the MFA earlier this year. Following some amendments, the Senate has approved this very significant state tax legislation.

Marketplace Fairness Act of 2013

Minimum Simplification Requirements

The MFA would grant all states the ability to require remote sellers to collect and remit existing state and local sales and use taxes, if certain conditions are met.7 SSUTA member states would have the ability to impose the collection and remittance requirement provided that any changes to the SSUTA made after the MFA is enacted do not conflict with the minimum simplification requirements stated in the MFA that are explained below.8 A non-member SSUTA state would have the ability to impose the collection requirement once it adopts legislation containing the required minimum simplification requirements.9 For a non-member SSUTA state, the enacting legislation must specify: (i) the taxes to which the state's authority to impose a collection and remittance requirement upon remote sellers will apply; and (ii) the products and services otherwise subject to these taxes to which the state's authority to impose a collection requirement upon remote sellers will not apply.10

The minimum simplification requirements contained in the MFA are as follows:

  1. There must be a single entity within the state to administer all state and local sales and use taxes, a single audit for all taxing jurisdictions within the state, and a single return to be filed with the single administering entity;11
  2. The state cannot require a remote seller to file sales and use tax returns more frequently than required for non-remote sellers or impose requirements on remote sellers that the state does not impose on non-remote sellers with respect to the collection of sales and use taxes under the MFA;12
  3. There must be a uniform sales and use tax base among the state and local taxing jurisdictions;13
  4. Remote sales must be sourced to the location "where the item is received by the purchaser;"14
  5. The state must provide remote sellers with information indicating the taxability of products and services in the state and a rates and boundary database;15
  6. The state must provide remote sellers with software free of charge that will: (i) calculate sales and use taxes due on each transaction; (ii) file sales and use tax returns; and (iii) reflect rate changes;16
  7. The state must provide certification procedures to software providers who make the software and services available to remote sellers;17
  8. The state must relieve remote sellers from liability (including any penalties and interest) for tax collection errors resulting from an error or omission made by a certified software provider;18
  9. The state must relieve certified software providers from liability (including any penalties and interest) for tax collection errors due to misleading or inaccurate information provided by the remote seller;19
  10. The state must relieve both remote sellers and certified software providers from liability (including any penalties or interest) for tax collection errors due to incorrect information or software provided by the state;20 and
  11. The state must provide both remote sellers and certified software providers with 90 days' notice of a state or local level rate change.21

A state that is a member of the SSUTA would be allowed to impose a collection and remittance requirement upon remote sellers 180 days after it first publishes notice of its intent to exercise its authority under the MFA.22 A non-member state could begin exercising its authority no earlier than the first day of the calendar quarter that is at least six months after the date of its enactment of legislation adopting the simplification requirements.23

Small Seller Exception

The MFA contains an exception for small remote sellers with $1 million or less in gross annual receipts in nationwide remote sales, measured in the preceding calendar year.24 These small remote sellers would not be required to collect sales and use taxes on these remote sales. For purposes of whether this $1 million threshold is met, the gross annual receipts from remote sales of two or persons must be aggregated if: (i) such persons are related to the remote seller under certain provisions of the Internal Revenue Code;25 or (ii) such persons have one or more ownership relationships that were designed with a principal purpose of avoiding the application of the MFA.26 Since the definition only considers remote sales in making the determination of who is an exempt small seller, it is possible for a seller to be exempt from the collection responsibilities on its remote sales if it had $1 million or less of total remote sales in the United States during the prior calendar year even though it had, for example, $5 million of retail sales at its store locations during the same prior calendar year.

While the MFA defines an exempt small seller as a remote seller that "has gross annual receipts in total remote sales in the United States" of $1 million or less in the prior calendar year, many of these terms are undefined in the MFA. This may subject certain remote sellers that primarily sell non-taxable items to collection and remittance obligations. By way of example, a remote seller with $850,000 of remote sales of non-taxable services, $50,000 of remote sales of taxable tangible personal property, and $100,001 of remote sales of tax-exempt items of tangible personal property, would still be required to collect tax on the $50,000 of remote sales of taxable items of tangible personal property since it would not qualify as an exempt small seller.

Also, this exception differs from some recommendations to use a state-by-state sales threshold to determine small seller status. As it stands, a seller that makes exactly $1 million of annual remote sales into a single state would qualify for the small seller exception, whereas a seller who makes only a small amount of annual remote sales into any particular state (for example, $30,000) may be within the reach of the state's authority to require collection if the seller's total annual remote sales are more than $1 million.

Limitations of the MFA

The MFA specifies that it should not be construed to affect the application of any type of tax other than sales and use taxes (i.e., franchise, income or occupation taxes).27 The MFA's grant of authority to states is limited to the authority to impose a collection and remittance requirement with respect to sales and use taxes only.

Moreover, the MFA expressly provides that it does not "create any nexus or alter the standards for determining nexus between a person and a State or locality."28 That is, the MFA does not change the nexus rules or the sufficient amount of connection required between an entity and a state to subject the entity to the state's taxing jurisdiction. Those rules remain the same and if enacted, the MFA would merely carve out a legislative exception to those rules.

The MFA was amended to clarify that nothing in the MFA may be construed to deny a remote seller's ability to deploy and use a certified software provider of the seller's choice.29 Also, nothing in the MFA should be construed as encouraging a state to impose sales and use tax on any products or services not subject to tax prior to the enactment of the MFA.30 The MFA provides that it has no application to a variety of enumerated licensing and regulatory requirements, intrastate sales or sourcing rules, and no effect on the Mobile Telecommunications Sourcing Act.31 Finally, the MFA does not pre-empt or limit any powers of states or local jurisdictions under its own laws or federal law.32


The MFA has received considerable publicity and will have a substantial impact on states, remote sellers and sales tax collections if it is enacted. The Senate's approval of the MFA is a major development in state tax law. The MFA is expected to be considered in the House of Representatives, where the prospect of approval is less certain. Specifically, House Judiciary Committee Chair Bob Goodlatte has indicated that he has concerns about the MFA and would likely seek to amend it, but did not indicate when his committee planned to consider the MFA. Note that President Barack Obama has indicated his support of the MFA.

The MFA has long been championed by large brick-and-mortar retailers, who argue that Internet retailers have an unfair advantage because they are not required to collect sales tax on purchases in states in which they have no physical presence. Opponents of the MFA argue that it will hamper one of the fastest growing segments of the economy, burden small online retailers and unfairly allow states to target businesses outside their borders.

Note that some significant amendments were made to the MFA before it was passed by the Senate. As introduced, the MFA authorized member states to require remote sellers to collect tax "only if the Streamlined Sales and Use Tax Agreement includes the minimum simplification requirements" contained in the MFA. As amended, member states are authorized to require tax collection "only if any changes to the Streamlined Sales and Use Tax Agreement made after the date of the enactment of this Act are not in conflict with the minimum simplification requirements" in the MFA. This amendment indicates that a determination has been made that the SSUTA currently includes the necessary simplification requirements. However, the SSUTA may not be amended to conflict with the simplification requirements contained in the MFA.

The MFA was amended to provide that an SSUTA member state may begin to collect tax on remote sellers beginning 180 days after the state publishes notice of its intent to exercise its authority under the MFA (but no earlier than the first day of the calendar quarter that is at least 180 days after the MFA is enacted). Prior to amendment, the time period was only 90 days. This change provides remote sellers making remote sales that are sourced to customers located in SSUTA member states with additional time to comply with the MFA. Also, this is consistent with the provision that a non-SSUTA member state can begin exercising its authority no earlier than the first day of the calendar quarter that is at least six months after the date of its enactment of legislation adopting the simplification.

The simplification requirements for non-SSUTA member states were clarified to provide that a state may not impose requirements on remote sellers that it does not impose on non-remote sellers. Also, the definition of "remote sale" was amended to mean a sale into a state, as determined under the sourcing rules provided in the MFA, in which the seller would not be required to pay, collect or remit state or local sales and use taxes unless provided by the MFA. Prior to amendment, the definition did not reference the sourcing rules. Finally, the definition of "state" was expanded to include tribal organizations.

The MFA is intended to provide some level of sales tax simplification in an effort to make it easier for remote sellers to comply with the collection and remittance process. However, an argument can be made that the MFA does not address all concerns by those remote sellers to be impacted, including collection discounts to offset the costs of compliance, and more overall state-to-state uniformity in determining whether particular items are subject to the sales and use tax. Also, as discussed above, a state must provide remote sellers with software free of charge that will: (i) calculate sales and use taxes due on each transaction; (ii) file sales and use tax returns; and (iii) reflect rate changes. However, at this time, it is unclear how this certified software would operate, and whether such software would sufficiently simplify the compliance process for remote sellers. Accordingly, while the Senate's passage of the MFA is a significant step (and one that had not been attained by prior iterations of the bill), enactment of the MFA is far from assured.


1 S. 743, as passed by the Senate on May 6, 2013. Note that this bill was originally introduced as S. 336 on Feb. 14, 2013. Also, an identical corresponding bill, H.R. 684, was introduced in the House on Feb. 14, 2013. The Senate's legislation was amended prior to passage.

2 A member state could not exercise its authority under the MFA earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the MFA.

3 For example, sales tax nexus legislation has been enacted by Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Kansas, New York, North Carolina, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia and West Virginia, and currently is being considered by several other states.

4 Quill v. North Dakota, 504 U.S. 298 (1992).

5 On July 29, 2011, members in both chambers introduced identical bills called the Main Street Fairness Act (S. 1452 and H.R. 2701). In addition, on October 13, 2011, the House introduced the Marketplace Equity Act (H.R. 3179), and on November 9, 2011, the Senate introduced the Marketplace Fairness Act (S. 1832).

6 "Member states" excludes associate members under the SSUTA. S. 743, § 4(4).

7 S. 743, § 2(a), (b).

8 S. 743, § 2(a).

9 S. 743, § 2(b).

10 S. 743, § 2(b)(1).

11 S. 743, § 2(b)(2)(A).

12 Id.

13 S. 743, § 2(b)(2)(B).

14 S. 743, §§ 2(b)(2)(C), 4(7). This is based on the delivery location. If no delivery location is specified, the remote sale is sourced to the customer's address. If the customer's address is unknown or cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. These are the sourcing rules that are contained in Section 310 of the SSUTA.

15 S. 743, § 2(b)(2)(D)(i).

16 S. 743, § 2(b)(2)(D)(ii).

17 S. 743, § 2(b)(2)(D)(iii).

18 S. 743, § 2(b)(2)(E).

19 S. 743, § 2(b)(2)(F).

20 S. 743, § 2(b)(2)(G).

21 S. 743, § 2(b)(2)(H). If a state fails to provide 90 days' notice of a rate change, the state must hold remote sellers or software providers harmless for collecting the tax at the immediately preceding effective rate during the 90-day notice period.

22 S. 743, § 2(a). This can be no earlier than the first day of the calendar quarter that is at least 180 days after the date of the enactment of the MFA. Note that a recent amendment changed this time period from 90 days to 180 days.

23 S. 743, § 2(b).

24 S. 743, § 2(c).

25 Such persons must be related to the remote seller within the meaning of IRC §§ 267(b), (c) or 707(b)(1).

26 S. 743, § 2(c).

27 S. 743, § 3(a).

28 S. 743, § 3(b).

29 S. 743, § 3(c).

30 S. 743, § 3(e).

31 S. 743, § 3(d), (f), (g).

32 S. 743, § 6.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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