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National Attempts to Impose Sales Taxes on Online Retailers

 

Currently, there is no federal scheme in place that allows states to enforce their sales tax for online purchases. Because of this, many argue that there is a large competitive advantage for online retailers who are not required to pay these state sales taxes over their storefront counterparts.1 In an attempt to harmonize existing legislation, congress has entertained several bills over the last few years that would allow states to impose sales tax on online retailers. The most successful of these attempts, the Marketplace Fairness Act, was passed by the Senate in 2013.2 Despite the senate’s efforts, the legislation has faced opposition from the House, lobbyists, online retailers and state legislators.3

The Marketplace Fairness Act was first passed by the senate in May 2013. In the time since then, the act has stalled in the house but is expected to gain momentum in 2015, bringing it back to the national forefront.4 Among the many critics are state lawmakers who claim the efforts circumvent federalism by imposing a sales tax on retailers who operate in a non-sales tax states.5  According to these critics, this form of taxation would equate to “taxation without representation.”6 With the support of online retailers, Republicans in the House have raised similar concerns.7  It is critiques such as these that have caused the act to languish in the House for over a year.

Despite the concerns of these critics, the mechanics of the bill would constrain the application of the bill to a limited class of online retailers, consumers and states. For one, the act would only apply to large online retailers that make over $1 million in sales annually.8  Additionally, the act would only require that retailers pay the state’s sales tax based on the location of the buyer.9  Finally, only states that meet the act’s requirements are permitted to collect sales tax on qualifying online purchases. In order to impose their sales tax on these online retailers, states are required to either adopt the Streamline Sales and Use Tax Agreement or meet five simplification mandates.10

There are a variety of constitutional limits that prevent states from legislating online retailors, leaving the federal government to regulate the matter. States cannot impose their sales tax across borders without confronting the constitutional limits imposed by the dormant commerce clause. Federal legislation such as the Marketplace Fairness Act would completely overcome this obstacle. In Quill v. North Dakota the Supreme Court reiterated these limitations on the ability of states to impose their sales tax on out of state retailers.11 Despite this, several states have attempted to implement legislation that would impose taxes on these interstate online retailers for purchases made within the boundaries of the state.  Remaining consistent with the Supreme Court, several state courts have also deemed these “Amazon Laws” unconstitutional.12

In light of these limitations on state action, the Federal legislature has made several attempts to regulate the issue. The Main Street Fairness Act and Marketplace Equity Act of 2011 each attempted to aid states in collecting these taxes.  Like the Marketplace Fairness Act, the Main Street Fairness Act would also have required states to implement the Streamline Sales and Use Tax Agreement.  Alternatively, the state requirements imposed under the Marketplace Equity Act would have been less stringent than the Streamline Sales and Use Tax Agreement. While congress has made several attempts to legislate the issue, it appears that the House may draft a fourth bill as an alternative to the Marketplace Fairness Act that would give states a more limited power to collect taxes on out of state retailers.13  The many attempts and continued opposition on the state and national level illustrate that the fate of the Marketplace Fairness Act and similar sales tax legislation remains speculative.


  1. Geoffrey E. Weyl, Quibbling with Quill: Are States Powerless in Enforcing Sales and Use Tax-Related Obligations on Out-of-State Retailers?, 117 Penn St. L. Rev. 253 (2012). 

  2. Marketplace Fairness Act, S. 1832, 112th Cong. (2011). 

  3. John McKinnon and Kristina Peterson, Internet Sale Tax Faces Republican Opposition, Wall St. J. (Nov. 11, 2014), http://www.wsj.com/articles/internet-sales-tax-faces-republican-opposition-1415739069

  4. GamePolitics Staff, Congress Likely To Revisit The Marketplace Fairness Act in 2015,  GamePolitics.com (Jan. 5, 2015) http://www.gamepolitics.com/2015/01/05/congress-likely-revisit-marketplace-fairness-act-2015#.VNF2WGTF_RI. 

  5. Lisa Lambert, State lawmakers slam attempt at online sales tax law, Reuters (Jan. 27, 2015) http://www.reuters.com/article/2015/01/27/us-usa-states-salestax-idUSKBN0L02WA20150127. 

  6. Id. 

  7. McKinnon, supra note 2. 

  8. Marketplace Fairness Act Compliance, MFA (last visited Feb 1, 2015) http://marketplacefairness.org/compliance/. 

  9. Id. 

  10. What is the Marketplace Fairness Act, MFA (last visited Feb 1, 2015) http://marketplacefairness.org/compliance/. 

  11. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). 

  12. Weyl, supra note 1. 

  13. Bernie Becker, House chairman circulates online sales tax draft, The Hill (Jan. 13, 2015) http://thehill.com/policy/finance/229429-house-chairman-circulates-online-sales-tax-draft. 

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Shannon Conaway