By Edward A. Zelinsky
The Marketplace Fairness Act, now being debated in the US Senate, is a rare phenomenon: a bill with strong bi-partisan support and an accurate title. The Act would indeed establish fairness in the marketplace by imposing on out-of-state internet and mail order sellers the same sales tax withholding requirements now imposed only on in-state brick-and-mortar businesses. The Senate and then the House should adopt the Marketplace Fairness Act so that the President can sign it into law.
In 1992, the US Supreme Court in Quill Corporation v. North Dakota held that a state cannot require out-of-state sellers to collect sales taxes when such sellers ship goods into the state since such out-of-state sellers have no physical presence in the state. Quill Corporation conducted a classic mail order business in North Dakota. Quill sold office and equipment supplies to North Dakota customers, but had no salespersons, stores or other physical presence in North Dakota. Quill Corporation advertised in North Dakota, mailed catalogs and flyers to North Dakota households, and shipped purchased goods to North Dakota customers via mail or common carrier.
Since Quill Corporation had no in-state physical presence, the US Supreme Court ruled, North Dakota could not require Quill to collect sales tax from North Dakota customers on such customers’ purchases. However, the Court made clear, Congress can change this result by federal legislation authorizing states to impose sales tax withholding obligations on out-of-state sellers.
Since Quill, online commerce has burgeoned in important measure because out-of-state internet firms need not collect sales taxes while stores with in-state presence must. This unfairly disadvantages both ma-and-pa in-state stores which must collect sales taxes and so-called click-and-brick sellers like Staples.com and Walmart.com which, because of their in-state stores, must collect sales taxes on their internet sales. In contrast, online and mail order sellers which eschew such in-state stores can effectively sell sales tax-free since, under current law, such sellers cannot be required to collect sales taxes because they are not physically present in the state.
This situation is neither fair nor efficient. Technically, purchasers of online and mail order merchandise must on their own pay taxes on their purchases from out-of-state firms. In practice, the states cannot collect and enforce taxes on most online and mail order purchases. This disadvantages in-state businesses which must collect sales taxes while their internet and mail order competitors need not.
The Marketplace Fairness Act would overturn Quill for large internet and mail order sellers. The Act would thereby put sellers on the proverbial level playing field by authorizing states to require out-of-state sellers like Quill Corporation to collect sales taxes even when such sellers lack in-state physical presence.
Some opponents characterize the Act as establishing a new tax. Some opponents also argue that the Act would impose an unfair burden on small businesses. Neither argument is correct.
Internet and mail order buyers have always owed taxes on their purchases. Such buyers have generally been unaware of or have ignored their obligation to pay taxes on their purchases from out-of-state sellers. The Marketplace Fairness Act would put buyers from mail order and electronic sellers in the same position as persons who purchase from in-state brick-and-mortar stores, that is to say, subject to sales tax withholding by the seller.
Moreover, the Act would only permit states to impose sales tax collection responsibility on internet and mail order firms with at least one million dollars in out-of-state sales. Truly small businesses would, per the Quill, still enjoy immunity from tax collection responsibilities on their out-of-state sales as long as they have no physical presence in the taxing state.
Some states will use the revenues they collect under the Act to balance their budgets. Others will use those revenues to lower their respective sales tax rates. Each state should be free to decide for itself.
The Marketplace Fairness Act is long overdue. It is neither fair nor efficient to require brick-and-mortar sellers to collect sales taxes while their on-line and mail order competitors effectively sell sales tax-free. By overturning Quill, the Act would indeed establish tax fairness in the marketplace.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at theBenjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.
Subscribe to the OUPblog via email or RSS.
Subscribe to only law and politics articles on the OUPblog via email or RSS.
Image Credit: President Obama’s address to a joint session of Congress by Lawrence Jackson. Public domain via Wikimedia Commons.