On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (a.k.a, the “Internet Sales Tax Bill” by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales. The bill, if passed in the House and signed by the President, would enable states to collect from certain online sellers sales and use tax on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a seller to collect the state’s tax unless the seller has a physical presence within that state.

Small seller exemption

The Marketplace Fairness Act includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act.

Proponents of the bill say that the main issue is fairness. Brick-and-mortar retailers have long argued that the physical presence restriction provides Internet sellers with an unfair advantage. By not collecting sales tax, an online retailer seller can, in effect, sell an item at a lower price than a store. Retailers who operate stores have increasingly complained of “showrooming” by customers who come to a store to browse and then order the same merchandise online where they will not be charged for sales tax.

On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 jurisdictions. Conservative groups also contend that the Marketplace Fairness Act allows overreaching by state governments.

Authority to require tax collection

The Marketplace Fairness Act would allow a state to require all online sellers that do not qualify for the small seller exemption to collect tax on all taxable sales sources to that state. Streamlined sales tax member states would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.

Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to exercise the authority and implements the Marketplace Fairness Act’s mandatory simplification requirements.

The Marketplace Fairness Act is currently sitting in the House of Representatives. For information on any recent developments, please contact our offices.