A groundbreaking bill allowing states to tax remote sales under certain circumstances passed the Senate last year and may be joined by a companion bill in the House of Representatives later this year. Many remote sellers (such as most Internet and mail order retailers) haven’t been required to collect and remit sales and use tax on purchases in states where they don’t have a physical presence. This has given them a distinct tax advantage over brick-and-mortar retailers. Traditional retailers, on the other hand, have urged Congress to make every retailer, whether remote or not, play by the same rules.
The Senate bill, called the Marketplace Fairness Act of 2013 (MFA), would enable states to require out-of-state sellers to collect and remit sales and use tax on sales to in-state residents even if those retailers had no physical presence in the state. Its passage in the House in its current form is unlikely because the House Judiciary Committee is expected to draft a bill addressing the remote seller issue in the coming months. House Judiciary Committee Chair Bob Goodlatte released seven guiding principles on the subject that are designed to serve as the starting point of the House bill. Hearings may be held in the next few weeks to discuss these principles in further detail.
As the issue has been discussed, legislators have attempted to address numerous concerns. Senators amended the MFA before passing it. They wanted to simplify sales tax to try to make it easier for remote sellers to comply with the collection and remittance process. Despite the amendments, some still argue that the MFA doesn’t address all concerns by remote sellers who would be affected.
Another potential complication is the requirement that states provide remote sellers with software free of charge to calculate sales and use taxes due on each transaction, to file sales and use tax returns, and to reflect rate changes. It’s unclear how this certified software would operate and whether it would simplify compliance enough for remote sellers.
Given the length of time Congress has taken to address the issue, several states have enacted click-through or affiliate sales and use tax nexus legislation to require certain remote sellers, like online vendors, in an effort to collect tax on sales to in-state residents. It’s unclear, however, whether this state-specific legislation violates the U.S. Constitution.
The U.S. Supreme Court in December 2013 declined to consider whether New York’s click-through nexus statute is facially constitutional in two cases: Overstock.com Inc. v. New York State Department of Taxation and Finance and Amazon.com LLC v. New York State Department of Taxation and Finance. The online retailers attempted to challenge the constitutionality of New York’s click-through nexus statute, which presumes sales tax nexus for certain online retailers. Overstock.com and Amazon.com claimed the statute facially violates the U.S. Constitution’s Commerce Clause and Due Process Clause. In an earlier decision by the New York State Court of Appeals — the state’s highest court — the statute was found constitutional. However, the Illinois Supreme Court recently held in Performance Marketing Association, Inc. v. Hamer that the Illinois version of the click-through nexus statute was pre-empted under the Supremacy Clause of the U.S. Constitution because the Internet Tax Freedom Act prohibits discriminatory state taxes on electronic commerce.
The U.S. Supreme Court’s unwillingness to grant certiorari to click-through nexus litigation arising from lower courts implies that Congress will need to determine the extent to which remote sellers should be subject to state sales and use tax. Accordingly, retailers and remote sellers should prepare for the possible passage of MFA or equivalent legislation. Consider where the legislation would require your business to file in the future as opposed to where you currently file under existing state laws. As a means to prepare for potential tax collection in numerous jurisdictions, your business should conduct a readiness assessment of their sales order process, available tax collection software, ability to meet new deadlines and potential in-house and outsourcing options. In addition, your business also should consider what additional information will need to be collected from customers or service providers.
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