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Adopt the Marketplace Fairness Act

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.

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Image Credit: President Obama’s address to a joint session of Congress by Lawrence Jackson. Public domain via Wikimedia Commons.

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12 Responses to “Adopt the Marketplace Fairness Act”
  1. Mike K. says:

    I strongly disagree that this bill is “fair”. I run a small online business that would be overburdened by a mountain of accounting and tax payments to each state for each individual purchase that is made on my site for my sales-tax-free dietary supplement in Pennsylvania. I would have to hire an accounting team to figure out which states tax dietary supplements (some states are very specific as to what kind of dietary supplements are taxed and what are not – leaving me open to an audit and possible tax fines from all 50 states if I get it wrong!). I also sell other products that are taxed in my state, but do not have sales tax in other states. It will be a complete nightmare.

  2. Sue Bowlby says:

    Dear Professor Zelinsky,
    I own a $1.5 million internet education business based in Delaware. I recently analyzed my revenue by state – something that is very time consuming since my software program, QuickBooks, doesn’t do it easily.

    What I found is that in most states my revenue does not exceed $150,000. In at least ten states, we have less than $2,000 in revenue. Most of those states have a 6% sales tax – which means they each state will get $120. In most of those states we will have annual and quarterly reporting requirements which we will have to pay our accountant to file. At $100 per hour, it will cost us a minimum of $500 per state to keep up with our reporting. That doesn’t include the time to set up everything to collect the tax.

    Frankly, that does not seem either fair or efficient. Without a minimum revenue per state, this legislation is very damaging.

    I would be happy to talk with you about this if you would like more thoughts from a “truly small business”.

    Sincerely,

    Sue Bowlby
    President
    Corexcel
    http://www.corexcel.com

  3. wayne roberts says:

    The burden on small and Medium sized businesses that do business out of state makes this legislation completely and utterly unfair. The cost of software, technology and staff to manage the analysis, collection, remittance, and reporting to 45 states with tens of thousands of jurisdictions and product class tax rates along should make a sane man think twice about this bill. Add in the costs and expenses of 45 State Audits each year that easily could cost tens of thousands in accountant expenses for each audit and you just bankrupted any business that does business in multiple states. If they want to create a level and easy playing field for all, then create a single national sales tax that the feds collect and distribute back to the states.. and allow states to opt out like the 5 today. But hey, big business lobbyists, and state bureaucrats dont really want fairness do they? They want $$$$ at the expense of the little entreprenuer with big dreams!

    DON QUIOTE

  4. Jeremy Norton says:

    “Brick and Mortar” sellers can sell online just like any online seller. (In fact most do.) It takes about $20 and 15 minutes to start selling online with Yahoo or GoDaddy. This isn’t about fairness, its about States wanted to extend their powers outside of their own jurisdiction. How is a small business in Huntsville having to file 50 different tax returns make it equal to a small business who only has to file one?

  5. Kirk B. says:

    This article smells of Socialism. Let’s stop group A from doing something because group B is not doing it, regardless of the reason group B is not engaging. And if we can’t stop them we should transfer their wealth to the State, all in the name of the little-guy. No, instead of regulation, let’s educate the Ma-and-Pa’s to take their business online. As for the State’s potential income, I would argue that they need to focus on reducing spending and not finding new income for current and future policies. While continued growth may be an admirable goal for corporations, government needs to focus on specific public services that don’t hinder the people from enjoying liberty, individualism, and a free market. Has anyone asked Ma and Pa about it?

  6. Lauren T. says:

    Here’s a better idea. If the point is to close the tax loop-hole of internet sales, why not have the seller collect taxes from all sales online and pay the tax to the state where the company physically exists (or existed first)? Then the states with the most online sellers will benefit from the increased tax revenue and businesses are not burdened with learning all of the tax codes for all of the states. Maybe this would also give an incentive to states will fewer online sellers to promote online businesses.

    As the owner of a small online business, I would rather report and pay sales taxes to one state, Texas, quarterly instead of all this nonsense of sending taxes to every state I’ve ever shipped an item to.

    Returns would be a nightmare, as well. Every return would prompt you to edit your sales tax report for the correct state in order to get the tax amount back.

  7. Jason Mills says:

    They are correct. I would have to shut my doors the instant this passes. There is no way we could keep up with the filing. The main issue being refunds. This bill is horrible and will be the end of small online business.

  8. R. Brunauer says:

    The author is a law professor. And I’m guessing, guy who has never run a business or started a business. Ivory tower professors should stay in their towers and quit trying to run everyone else’s lives inthe name of fairness.

  9. Joe says:

    Yeah, sorry, it’s not fair to small businesses. $1M gross is not a lot when you sell high price, low margin goods. I run an online small business but I do not make close to $1M gross in sales so this will not affect me. However, I met the owners of another online small business this weekend… just two of them, a couple, operating a store out of their home. From what I can tell, they definitely do $1M gross, this will affect them, and it will put a paperwork and accountancy burden on them. $1M is not a lot of money anymore and this bar is definitely too low. Any politician who votes “yes” on this act is absolutely anti-small business. Amazon should pay their share, sure, but leave small businesses out of this.

  10. Woody Walker says:

    When you you travel from another state to eat Corky’s Ribs in Memphis — the sales tax isn’t sent to your home state — but when you mail-order Corky’s Ribs from Memphis — the “internet fairness bill” requires Corky’s to collect an out of state sales tax. Corky’s becomes a tax collector for 9600 other jurisdictions. Why is that their job? They’re here to cook barbecue, not to add on 9600 out-of-state creditors that provide zero benefit in return. How fair is that?

  11. Woody Walker says:

    The internet fairness bill discriminates against the US Postal Service. I have a product in high demand and I’ll require my customers to come to the store and pay the sales tax where I live to benefit MY state. If it’s too far to drive then that’s just too bad. 75% of my customers are overseas anyway. Maybe I should just drop the USA as a customer and send my opportunities to a friendlier marketplace. I’m already considering that anyway.

  12. David says:

    If the Author had read Quill then he would know that the marketplace fairness act violates the due process clause as outlined in Quill.

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