It’s been kicking around in one form or another for the better part of a decade, but it looks as though it finally has some momentum.
It’s the Marketplace Fairness Act, which won a procedural vote in the Senate by a wide margin earlier this week, and looks poised to sail through without a hitch. It’s a bipartisan bill, with support among Republicans and conservatives as well as Democrats and big-government liberals. And its proponents claim that it will help the mom and pop, brick and mortar retailers compete against the big guys. So its success is assured, right? Not necessarily, according to those who intend a last-ditch effort to stop it in the House.
The Act is the result of an outcry by the states, which feel they are losing revenue, and local retailers, who see themselves losing revenue to online retailers.
The reason there’s an issue at all is the 1992 decision by the Supreme Court in Quill v. North Dakota, which prohibited states from requiring out-of-state retailers to collect sales tax from residents of the state unless they have a “nexus” in the state. Nexus is the minimum threshold of contact that must exist between a taxpayer and a state that would allow the state to impose tax.
The concept is based on two clauses in the Constitution: the Commerce Clause, which prohibits states from unduly burdening interstate commerce, and the Due Process clause, which requires a minimum connection between a state and an entity it wishes to tax.
“The bill attempts to address the concerns of the court that there are so many different taxing jurisdictions and rules for the sales taxes that made it very difficult for out-of-state retailers to comply with,” said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation. “The court indicated that if the rules could be simplified, that would address their concerns, and left it to Congress to fix. The bill includes a number of minimum simplifications that a state would have to adopt before being allowed to collect sales tax from a remote seller.”
“There can be different rates within the state, but only one base,” Bernstein noted. For example, a state might have a 6 percent tax, while a county within the state might add 3 percent on top of this. That’s all right, but a certain item can’t be a candy in one county and food in another.
The Quill decision said that whether a tax would interfere with interstate commerce is up to Congress, observed Steven Roll, assistant managing editor of state tax at Bloomberg BNA. “The bill is written in a pretty narrowly tailored fashion. It says you already have the power to collect if you simplify your sales tax regime in the following ways: It only applies to retailers with annual sales of $1 million or more, and only after the state simplifies its sales tax regime.”
Both Bernstein and roll anticipate easy passage in the Senate, but a tougher go in the House.
“At the end of the day, it will pass in the House,” said Bernstein. “I expect it to pass in the House.”
But not without opposition.
“A vote in favor of this trick is a vote in favor of ending the long-held physical nexus standard, and in favor of expansive government authority to bring the legal powers of tax enforcement beyond a state’s borders—a throwback to the Articles of Confederation,” said Bartlett Cleland, policy counsel at the Institute for Policy Innovation. “A vote in favor means granting states powers as far-reaching, and as ephemeral, as the Internet.”
And its proclaimed help for small businesses may be misplaced, according to opponents. “This bill will negatively impact small businesses that use ‘no sales tax’ as a way to compete on price against large retailers,” said Kenneth Wisnefski, an online marketing expert and the founder and chief executive of WebiMax. “It is very challenging for small businesses to survive beyond five years as of now, and this bill could most likely lessen that time span.”
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