By Edward Zelinsky
On 6 May 2013, the US Senate by a bi-partisan vote of 69-27 approved the Marketplace Fairness Act of 2013. The Act would require large, out-of-state Internet and mail order sellers to collect sales taxes, just as brick-and mortar stores must collect such taxes.
The attorneys general of Oregon, Alaska, and Wyoming recently wrote to their respective states’ U.S. representatives, claiming that the Act is unconstitutional and urging the House to reject the Act. The three attorneys general are wrong. The Marketplace Fairness Act is constitutional and should be passed into law.
Today, as a result of the U.S. Supreme Court’s Quill decision, a state cannot require an Internet or mail order seller to collect sales tax unless that seller has a store, warehouse or other physical presence in the state. This effectively allows out-of-state remote sellers such as Amazon and eBay to sell tax-free and puts brick-and-mortar stores at an unfair competitive disadvantage since such in-state stores must collect sales tax.
I am a Connecticut resident and recently bought an electric razor through Amazon. Because Amazon has no physical presence in the Nutmeg State, Amazon did not collect sales tax on my purchase. On the other hand, if I had purchased this same electric razor at Walmart or at any other brick-and-mortar store, the seller would have been required to collect Connecticut sales tax on my purchase because of the seller’s physical presence in the state.
As a matter of law, Internet and mail order purchasers are obligated to pay the tax which the out-of-state seller fails to collect. In practice, few purchasers report and pay sales tax on the merchandise they buy from out-of-state remote sellers.
The Marketplace Fairness Act would overturn Quill and its physical presence test and would authorize a state to impose sales tax collection responsibilities on a large, out-of-state remote seller when it ships goods into the state. Thus, in a case like mine, the Act would permit Connecticut to require Amazon to collect sales tax on the electric razor I purchased online. The Act would thereby equalize the playing field for out-of-state remote sellers and conventional in-state stores, requiring both to collect sales tax from their purchasers.
The three attorneys general argue that Marketplace Fairness Act would unfairly burden small Internet and mail order sellers by requiring such sellers to collect sales taxes when they ship goods to out-of-state purchasers. In the words of the three attorneys general:
[R]equiring small, brick-and-click remote sales retailers to collect and remit use taxes to upwards of 9,600 taxing jurisdictions will be a costly burden on our small businesses making it more difficult for them to compete in the market.
None of this is persuasive. The Act only applies to sellers with annual remote sales of $1,000,000 or more. Truly small businesses which remain below this remote sales threshold will still be protected by Quill’s physical presence test and thus will not collect sales taxes on their out-of-state sales through the Internet or mail order catalogs.
Moreover, the Act does not require sellers to collect and remit taxes “to upwards of 9,600 taxing jurisdictions.” The Act specifically requires each state to designate for out-of-state remote sellers a single enforcement entity (such as the state’s Department of Revenue) to administer and enforce all state and local sales taxes within the state. This single entity must issue a single tax return which remote sellers will file for their tax obligations throughout the state. In addition, each state must provide free software for use by out-of-state Internet and mail order sellers to facilitate such sellers’ compliance with the state’s sales tax collection responsibilities.
The attorneys general are on more solid ground when they complain that a single sale by a remote seller into a state will trigger the seller’s obligation to collect sales tax in that state. This, the attorneys general tell us, violates the Due Process Clause of the U.S. Constitution.
As a matter of constitutional law, the attorneys general are wrong. As they acknowledge, the relevant tests under the Due Process Clause have been framed by the U.S. Supreme Court in terms of rationality, the existence of minimum contacts between an out-of-state seller and the taxing state, and whether the out-of-state seller has purposefully availed itself of the government benefits provided by the taxing state.
If the Marketplace Fairness Act becomes law, all out-of-state sellers will have formal notice that their first sale into a state will trigger the obligation to collect that state’s sales tax. Such a remote seller must be selling $1,000,000 annually into other states to be subject to the Act and its tax collection mandate. Such a seller will have the option of not making his first sale into a new state. If the seller does make that first sale into a new state, the Act will have put the seller on notice that, by availing himself of the new state’s marketplace, he will henceforth be obligated to collect the new state’s sales tax — just as the seller will have been collecting the sales taxes of the other states into which it is selling on-line or by mail order (or both).
As a Due Process matter, there is nothing irrational about this. The constitutionally-required minimum contact between a state and a remote seller will be established when the seller makes its first sale into that state. That seller will be on notice that its first sale will trigger the obligation to collect tax in that new state.
However, as a matter of tax policy, the three attorneys general raise a fair point which should be addressed in the House of Representatives. While not constitutionally necessary, it would be better for the Marketplace Fairness Act to augment its $1,000,000 sales trigger for collection responsibility with a per state threshold. I have previously suggested that an out-of-state Internet or mail order seller’s obligation to collect sales tax for any particular state only start when the seller ships $10,000 of merchandise annually into that state. The House could easily add such a per state limit to the Act in addition to the requirement that the sellers’ total annual remote sales be $1,000,000 or more.
The bottom line is that the Quill-based status quo is neither fair nor efficient. Under current law, merchandise purchased from conventional brick-and-mortar stores is subject to sales taxation in most states while that same merchandise, purchased on-line or through mail order from an out-of-state seller, is effectively not taxed. This is neither equitable nor economically sound. The stores unfairly disadvantaged by the current situation are not just the Walmarts and other big box retailers, but also the smaller, locally-owned retail stores which must collect sales tax on the same merchandise Amazon and similar Internet and mail order effectively sell tax-free.
The three attorneys general are wrong to oppose the Marketplace Fairness Act and to claim that the Act is unconstitutional. The House of Representatives should follow the large, bi-partisanship majority of the Senate and the pass the Act.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin 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 on the OUPblog.
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