Internet retailers have enjoyed exemption from the requirement to collect sales taxes since 1992, when the U.S. Supreme Court passed a ruling closing the case of Quill Corporation v. North Dakota, at which point it was decided that, in states where online retailers have no brick and mortar presence, or nexus, they were not required to collect sales tax. The original ruling was based on the Commerce Clause, rather than due process, and had it been the other way around, the fact that Quill Corporation's merchandise could be physically found in the state of North Dakota would have changed Internet taxation two decades ago. Instead, Congress was given the right to overrule its decision through future legislation. Now, a deal settled over floppy disks could be reopened to result in widespread taxes, as lawmakers look to establish credible "click-through nexus."
Leaders, legislators and those with something to sell are watching the polls, anticipating the elections this month will be the factor making or breaking the lines between Internet and storefront sales tax. Meanwhile, nexus laws are being made to tighten the slack. More than two-dozen states have already jumped on board the Streamlined Sales and Use Tax Agreement (SSUTA), which went into action in fiscal 2011 in some states, ensuring that "all retailers can conduct business in a fair competitive environment." In an attempt to help independents and level the playing field, the Main Street Fairness Act out of Massachusetts, the House's Marketplace Equity Act and the Senate's Marketplace Fairness Act have been generating loftier waves as the elections approach, and economic tides are turning. With so many proposals waiting in the same line, how can business owners determine the difference between them? The three major players in this game do share a common goal, but disagree in numerous respects. Here is where they stand.
The Main Street Fairness Act was introduced by Massachusetts Democrat William Delahunt, a former member of the House of Representatives. Intended to create sales tax revenue for local communities, it asks states to simplify tax collection requirements by adopting the SSUTA, and excuses some small businesses from collecting sales tax online from other states. It calls for a centralized, multistate registration system, and would require universal software to be used to monitor business finances. Sales taxes would be audited, and a minimum compensation requirement would be set for expenses incurred by sellers seeking to administer, collect or remit taxes. In addition, a governing board would be established to ensure that legal taxation requirements are met by both online and brick and mortar retailers. In other words, the Main Street Fairness Act would tackle the issue by creating a committee of people to do so, with none among them likely to have wholesale experience. Many of those finer details of the Main Street Fairness Act are not a part of the other two Marketplace Acts, but common ground exists between them. All three proposals make room for small seller exemptions, and ask Internet sellers to adhere to the SSUTA to some degree.
Neither the Marketplace Fairness Act nor the Marketplace Equity Act support the registration system called for by the Main Street Fairness Act. Additionally, both the Fairness and Equity Acts enforce that if a state no longer meets the tax requirements of the legislation, that state loses authority and is turned over for judicial review. Where these Acts continue to heat up in disagreement, however, is in auditing and liability of the sellers. Under the Equity Act, sellers that make errors due to incorrect information provided by their state would only receive liability protection if they were required to pay a destination tax rate, whereas under the Fairness Act, liability protection would be provided unconditionally, which works out more favorably for wholesalers in the long run. The biggest area of disagreement between the Equity and Fairness Acts appears in defining exemptions. Under the Equity Act, a small business is not obligated to charge sales tax if its gross annual receipts total less than $1 million nationally or $100,000 within its home state. The Marketplace Fairness Act would exempt only those sellers whose gross annual receipts total less than $500,000. The gap is substantial enough to spark a dispute between lawmakers and affected businesses, and will be a key factor to monitor in the coming months. Small businesses and independent operations, especially, have much at stake if they fall between $100,000 and $500,000 in earnings. For them, Fairness and Equity could not be less synonymous.
The breakdown of the tax rate itself is another point of disagreement. The Main Street Fairness Act calls for a flat destination rate, which would equal the state's tax plus local delivery tax. Under Marketplace Equity, states must require remote sellers to pay one blended tax rate, the maximum state rate or the applicable destination rate provided by the state, as long as the destination state supplies liability protection for errors. In states where tax rates on food and drugs are lower, the lesser rate would apply for online purchases, as well. The Marketplace Fairness Act, however, would require a destination rate much like the Main Street Fairness Act, but with requirements for a 30-day notice of local tax rate changes written into its structure. This condition is not stipulated in the Main Street Act. Wholesalers stocking food or health products will be among those affected, should the Fairness Act take precedence.
Finally, for all three proposed Acts there remains the gray area of affiliate marketing. Websites such as Ebates.com and Groupon.com steer online shoppers towards brick and mortar stores through coupons and other special offers, and track which physical stores generate the most online activity. These marketers then receive commission based on that retailer's profits. While this may not seem to be a sales issue directly, the law takes interest in earnings in general, and such sites raise more questions about who owes what to whom, and why. It is likely that retailers will see red tape applied to these familiar marketing affiliates, and middlemen like Groupon could be forced to take a second look at current rates in order to cover new taxes, placing the burden directly on its customers' shoulders.
Government leaders have chipped in their thoughts on the subject for months, many expressing that it is vital for no law to be passed suggesting that all business models are synonymous. As Americans wait for this major political decisions to be made, the question is not when, where or if, but rather, which of the proposed Acts will be instated.
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