Tax Foundation Reports on Marketplace Fairness Act

The nonpartisan Tax Foundation research group has released a primer on the Marketplace Fairness Act, the legislation that proposes to establish federal law governing sales taxes on online purchases.

The legislation passed in the Senate last year, but has not made progress in the House (see Marketplace Fairness Act Stalls in Congress).

The Tax Foundation report offers an in-depth background and overview of the MFA and its alternatives, addressing: the 1992 Quill decision by the Supreme Court requiring a physical presence for “nexus,” along with the Streamlined Sales Tax Project, whose Streamlined Sales Tax Agreement forms the basis for the MFA legislation. The report also examines various states’ “Amazon” sales tax laws, a proposal for “hybrid origin-sourcing” and other proposed federal legislation.

The growing size of Internet retail and the disparity that results in the tax treatment between goods purchased online and those purchased at brick-and-mortar stores led the U.S. Senate to approve the Marketplace Fairness Act in 2013. The bill would give states limited additional authority to collect existing taxes, so long as the state adopts meaningful simplifications to their sales tax system.

The House has yet to consider the bill, but the House Judiciary Committee recently engaged in a search for alternatives to the MFA approach, the report noted. But so far, the alternatives the committee has produced (such as a simplistic “hybrid origin-sourcing” approach) have been fraught with insurmountable problems.

“Keeping the sales tax up to date with the modern economy is important for the states and brick-and-mortar retailers, just as making multistate sales tax collection as seamless and simple as possible is important for Internet retailers and the national economy as a whole,” Tax Foundation vice president of legal and state projects Joseph Henchman wrote in the report.

The report noted that the Marketplace Fairness Act would allow any state to require sales tax collection by out-of-state retailers, if the state simplifies its sales tax system. Sales taxes are paid by consumers, but are usually collected and remitted by retailers at significant cost. State taxation power is generally limited to individuals and businesses within the state’s borders, to prevent harm to the national economy from tax exporting. Some states are nonetheless passing “click-through nexus” statutes and demanding out-of-state retailers collect sales tax, leading to extended litigation and uncertainty. Other states are working with the Streamlined Sales Tax Project for greater tax uniformity.

A federal solution is needed and must allow states to collect sales tax on sales to their residents, eliminate unjustifiable tax distinctions between identical items, define the limits of state tax authority, and simplify the tax system to reduce compliance burdens, according to the report. The MFA bill is in this vein but would benefit from software compatibility requirements, a blended tax rate option, limits to state audit authority, and federal jurisdiction over disputes.

“Hybrid Origin-Sourcing,” or HOS, while appealing in its simplicity, would require fundamentally restructuring how sales taxes work, confusing consumers and posing immense administrative and legal obstacles, the report found. Because HOS allows states to tax consumers without minimum contacts with the state, it likely would violate the U.S. Constitution’s Due Process Clause.

The complete report is available here.

For reprint and licensing requests for this article, click here.