This concerns a piece of federal legislation called the Marketplace Fairness Act. The Marketplace Fairness Act gives states the power to compel retailers outside their borders to collect sales tax on online sales that are delivered to the state. Currently, states can only require merchants with a physical presence (nexus) within their borders to collect; this standard was set in the Supreme Court case Quill v. North Dakota in 1992. If the Act passes, more companies would be required to register and collect sales tax, which in turn will help states that need more sales tax revenue. Some of the highlights of the Marketplace Fairness Act are:
- The Marketplace Fairness Act has not yet been approved, but Congress is under significant pressure from states and large companies to pass the Act.
- The benefit to the states is more revenue and more assistance in collecting tax. The benefit to large companies that are well established, particularly brick-and-mortar businesses with physical presence in many states, is that companies with a more limited presence will have the same sales tax collection requirements and compliance costs.
- In its current form, the Act includes an exemption for merchants that generate less than $1 million in annual out-of-state revenue. This means that many businesses (both big and small) would be required to register and collect sales tax in every state where they have sales, regardless of a physical presence in the state. This is a significant departure from the current policy, which requires a minimal physical presence in a state before a company is required to collect and remit sales tax.
- If the Act is passed, many companies that have some limited e-commerce business (in addition to their brick and mortar operations) would see a significant jump in their reporting obligations.
- Since this is a contentious topic, it will likely be subject to litigation in a similar manner as the Quill case. It is important to note that if the Act is approved and implemented, companies will likely be required to comply with the new requirements until the litigation is complete. If the Marketplace Fairness Act makes its way to the Supreme Court, this process could take years.
ONESOURCE Indirect Tax