The Marketplace Fairness Act and Western State Revenues
On Friday, the U.S. Senate invoked cloture on the Marketplace Fairness Act and set May 6th as the day that the Senate will take final action. The Act would allow states to require all out-of-state sellers not qualifying for a small-seller exception to collect sales and use taxes. Essentially, the act requires larger mail order and online retailers to collect sales taxes on all purchases. The Council of State Governments passed a resolution in support of the Marketplace Fairness Act in 2012.
The U.S. Constitution grants states the right to levy taxes such as sales taxes, however online and mail order companies have not been collecting these taxes for many transactions. In 1992, the U.S. Supreme Court ruled inQuill Corp. v. North Dakota that business under the Commerce Clause of the U.S. Constitution must have a “substantial nexus” in a state for that state to require them to collect sales taxes. As a result, mail order and online retailers have used this case as a reason to not collect taxes. However, some states started to push back to redefine what a “substantial nexus” is by declaring that affiliates (people who send traffic to online retailers and get paid a percentage of sales that they directed to the site) constitute an in-state presence and therefore would require the retailers to collect sales tax. Online retailers have fought many of these laws in courts throughout the country. The Marketplace Fairness Act would explicitly allow states to require out of state retailers to collect the taxes as long as the state meets certain requirements.
While online sales make up only a small percentage of total sales, they are growing as a percentage of overall retail sales. According to the U.S. Census, in 2012 retail e-commerce sales totaled $225.5 billion and accounted for 5.2% of all retail sales, up from 4.7% the previous year. States with a sales or use tax residents are required to pay a use tax on any out of state purchases which they did not pay sales taxes. However, compliance rates are low and many states believe that they are missing out on a large chunk of revenue that they are due. In 2011, the California Board of Equalization estimated that taxpayers only paid 1.4% of use taxes due from online purchases. A recent study by the University of Tennessee estimated that states lost $12 billion in sales and use taxes from online sales in 2012 alone.