Proposed legislation in Congress seeks to grant authority to states to compel remote sellers, e.g. catalog- & internet-based sellers, to collect sales tax from their customers, whether the customers and sellers are located in the same state or not. Both proposed laws address concerns raised by the U.S. Supreme Court in two decisions: National Bellas Hess v. Illinois Department of Revenue, 386 U.S. 753 (1967), and Quill v. North Dakota, 504 U.S. 298 (1992).
The “Dormant” or “Negative” Commerce Clause
The U.S. Federal Government is only granted limited powers by the U.S. Constitution and all others are reserved to the states. Perhaps the most noteworthy of those powers granted is the plenary power to regulate interstate commerce, i.e. commerce that affects more than one state. This power is often called the “commerce clause” power. A close corollary to the commerce clause power is the “negative” or “dormant” commerce clause, which implicitly prohibits states from unduly burdening interstate commerce.
In 1967, the U.S. Supreme Court decided National Bellas Hess v. Illinois Department of Revenue and wrote the following regarding Illinois’ efforts to collect sales tax from sellers who did not have a physical presence in Illinois:
The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle [the seller’s] interstate business in a virtual welter of complicated obligations to local jurisdictions.
In other words, the Court was concerned that the administrative burden associated with complying with the each state’s sales tax laws was too great to impose upon remote sellers.
This holding was subsequently upheld when the U.S. Supreme Court decided Quill v. North Dakota in 1992. In that case, the Court stated:
[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.
In other words, the Court interpreted the U.S. Constitution as allowing Congress to pass legislation that allows states to compel sellers to collect sales tax.
Both the proposed Marketplace Fairness Act, making its way through the U.S. Senate, and the proposed Marketplace Equity Act, making its way through U.S. House of Representatives, seek to reduce potential administrative burden placed upon sellers by requiring that each state simplify its tax code before it can compel remote sellers to collect sales tax from buyers in such states.
Both proposed acts also set an exemption for sellers that generate less than a stated amount of sales per year. The Marketplace Fairness Act proposes that sellers with total annual gross U.S. sales less than $500,000 be exempt from collecting sales tax in states where they do not have a physical presence. In contrast, the Marketplace Equity Act proposes that sellers be required to collect sales tax from customers in states where a seller does not have a physical presence if a seller has total annual gross U.S. sales greater than $1,000,000 or if a seller generates more than $100,000 in sales from customers in any particular state.
If some version of the bills is passed, the effect upon catalog- and internet-based sellers that do not qualify for an exemption will likely be substantial in terms of revenue, accounting, and information systems.
This brief overview of some important considerations associated with the Marketplace Fairness Act & the Marketplace Equity Act is by no means comprehensive. Always seek the advice of a competent professional when making important legal and financial decisions.