Monday, June 3, 2013

The Marketplace Fairness Act: Are Online Retailers Now Required to Collect and Remit Every States’ Sales Tax Even Though They Do Not Have A Physical Presence?

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act (S.743). If enacted into law, the Act would require Internet sellers (as well as catalogers and other direct marketers) to collect and remit the sales and use tax of each state (and any local jurisdictions that assess sales taxes) on all of their remote sales to the state, even if the retailer does not have a physical presence in the state. If adopted, the bill would do away with the nexus/physical presence requirement for mandatory sales tax collection described in Quill v. North Dakota.

Much of the media coverage of the Marketplace Fairness Act gives the impression that the requirement of sales and use tax collection without a physical presence will be effective immediately, now that the Senate has passed the bill. That, of course, is not the case. In order for states to have the power to require sales tax collection by companies without a physical presence, the U.S. House must pass the bill in the same form as did the Senate, and then President Obama must approve the jointly passed legislation.

While President Obama has indicated his support for the Marketplace Fairness Act, there are a number of members of the House who are opposed to the bill. Moreover, unlike the Senate which did not hold any committee hearings prior to voting, the House will hold hearings on the legislation, through the House Judiciary Committee. Importantly, House Judiciary Committee Chairman Bob Goodlatte, a Republican from Virginia, has noted his concern regarding the failure of the Marketplace Fairness Act to address many of the concerns of remote sellers. Speaker Boehner has voiced similar concerns. Thus, it is likely that even if legislation abrogating Quill is adopted by the House ― a possibility given existing bipartisan support ― such a bill will probably not be in the same form as passed the Senate. Moreover, given the significant role played by Rep. Goodlatte, Speaker Boehner, and other members of the House, chances are there will be a substantial delay before adoption of any legislation. Indeed, the House Judiciary Committee has yet to schedule hearings on the bill, and it has been reported that the Committee is drafting its own legislation. The message for any remote seller should be wait and see, at a minimum, before embarking on costly measures to implement sales tax collection in the more than 9000 jurisdictions that impose sales taxes.

It is also important to note that the Marketplace Fairness Act, as passed by the Senate, gives a remote seller some time to implement new tax collection systems. For any state which is a member of the Streamlined Sales and Use Tax Agreement (“SSTA”), the state may only impose tax on remote sellers if it first publishes notice that it intends to exercise its authority under the Act. Once the state publishes notice, the state may not impose the tax until the first day of the calendar quarter that is at least 180 days (or 6 months) after publication. At this writing, there are 22 states that are members of the SSTA. For any state which is not a member of the SSTA, the state may not impose tax on remote sellers unless it adopts legislation enacting the alternative “minimum simplification requirements” spelled out by the Act. Remote sellers will have at least six months from the date of non-SSTA states’ enactment of alternative simplification to beginning collecting tax on their remote sales.

In short, there is a real possibility that the Marketplace Fairness Act will be defeated or modified prior to enactment. Moreover, remote sellers still have time to obtain and develop appropriate collection systems.  Indeed, it may well be premature at this time to begin implementing such systems, particularly since the shape of the legislation may change.

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