Storm Clouds on the Horizon for Direct Marketers Regarding Required Use Tax Collection

After the introduction in July 2011 of the “Main Street Fairness Act” by three senators from the Democratic Party, federal legislation intended to eliminate the Quill physical presence requirement for state sales and use tax collection has gathered increased support. A group of 10 Senators from both sides of the aisle introduced the “Marketplace Fairness Act” on November 9, 2011. The new bill, S.1832, is sponsored by Senators Mike Enzi (R-WY), Richard Durbin (D-IL), Lamar Alexander (R-TN), Tim Johnson (D-SD), John Boozman (R-AR), Jack Reed (D-RI), Roy Blunt (R-MO), Sheldon Whitehouse (D-RI), Robert Corker (R-TN), and Mark Pryor (D-AR). On October 13, 2011, Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) introduced in the House a similar, but not identical, bill called the “Marketplace Equity Act.”

As we wrote in our post on August 8, the Main Street Fairness Act, which was sponsored by Senators Durbin, Johnson, and Reed, does not provide meaningful measures to simplify the arduous burden of sales and use tax collection. The Marketplace Fairness Act (and its House counterpart) would provide even less simplification than does the Main Street Fairness Act. It is ironic that despite the unfairness of this proposed legislation to catalogers, online retailers, and other direct marketers, the Marketplace Fairness Act is more likely to pass than prior legislative efforts, because of the increased number of sponsors from both political parties, as well as the coalition of states, industry groups, and big retailers (including e-commerce giant Amazon.com), that have announced their support for this new bill. Thus, the alarm bells should be ringing loudly for Internet and other direct marketers.

Critical Additional Feature of the Marketplace Fairness Act

The Marketplace Fairness Act would extend collection obligations well beyond the Main Street Fairness Act to authorize any state that has not adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”), but has adopted negligible simplification measures, to require tax collection by remote sellers.

If adopted, the Main Street Fairness Act would permit states that become members of the SSUTA to require companies without a physical presence in the state to collect sales and use tax in the states. (There are 24 states that are members of the SSUTA). The Marketplace Fairness Act, on the other hand, incorporates this authorization and then expands it to permit any state that implements (in the language of the proposed legislation) “minimum simplification requirements” to require catalogers, online retailers, and other companies that have national annual sales greater than $500,000 to collect the state’s sales tax on sales to residents of the state.

The Marketplace Fairness Act is Anything But Fair

Although the SSUTA provides some protection to remote sellers from the burden and expenses of sales tax collection, the “simplification requirements” of this new bill provide even fewer benefits to catalog and e-marketers, and increased burdens.

There simply is nothing in this new bill that provides meaningful simplification for remote sellers. In other words, there is no provision for uniformity in sales tax laws among states; the simplification is only within the state, and the term “simplification” even within the state is a misleading term, at best.

We have discussed the SSUTA in various posts, which is incorporated, in effect, into that Act. As we have written previously, the SSUTA does not provide significant relief from administrative burdens and expenses of sales tax compliance. Just as under the SSUTA, the Marketplace Fairness Act does not ease the tax burden by requiring common exemptions throughout the states, uniform treatment for shipping and handling charges, and a consistent definition of the selling price for determining the amount subject to sales tax.

Similarly, like the SSUTA, the Marketplace Fairness Act permits the imposition of many combined (state and local) rates within a state based on the destination of the sale, thus potentially permitting a large number of different tax rates on sales to residents of the state, in addition to the thousands of tax rates a remote seller would be required to impose on its sales throughout the country. While the Marketplace Fairness Act specifies that a state must provide adequate software and services to identify the destination local rate and to hold harmless remote sellers from liability for mistakes made by a provider of sales tax administration services, this clause does not eliminate the administrative burden, expense, and risk to a remote seller of billing for, and collecting, sales and use taxes at different rates on its sales throughout the country.

Moreover, the Marketplace Fairness Act adds another layer of complexity that is not even present for the SSUTA. The SSUTA does provide for common definitions of some terms to be used in the sales tax statutes of the member states. The SSUTA also requires uniform rules among the member states for the deduction by a retailer of bad debts. The Marketplace Fairness Act does not require states to adopt such definitions and uniform rules regarding bad debts. The result is that if this new Act were adopted, a remote seller would be potentially subjected both to the definitions and bad debt rules of the SSUTA states and the differing and varying definitions and bad debt rules set forth in the statutes of the more than 20 non-member states.

There is a Real Possibility that the Marketplace Fairness Act Will be Adopted

Unlike prior state efforts to persuade Congress to enact laws eliminating the Quill physical presence test, there is increasing support from both Democrats and Republicans and from diverse industry groups for the Marketplace Fairness Act.

Over the past 20 years, the states have repeatedly caused legislation to be introduced in Congress to abolish the nexus physical presence requirement. The likelihood of successful adoption of the Marketplace Fairness Act, however, differs from prior legislative efforts for several important reasons:

•There is significant support from both Democrats and Republicans in Congress.
•The states are facing large financial problems (including mounting and huge pension costs), while federal funding for the states is drying up because Congress is not receptive to providing funding to assist the states at the expense of other federal programs or increased taxes.
•The legislation is supported by big box retailers.
•Well-funded associations such as the National Retail Federation and the International Council of Shopping Centers support the law.
•Amazon had been one of the most vigorous opponents of prior legislation. Now, Amazon is offering the service of collecting tax on behalf of other retailers for a fee of 2.9% of the taxes collected.

The only ray of light in this gloomy picture is that Senators Wyden (D-OR) and Ayotte (R-NH) and Representatives Lungren (R-CA) and Lofgren (D-CA) have introduced resolutions in Congress opposing mandatory collection by online retailers of sales and use tax.

A perfect storm has developed to permit passage of anti-Quill legislation. The current legislation being considered does not provide significant protection to industry members. It is up to direct marketers to let their positions be known.

Posted by Martin Eisenstein