Bipartisan legislation has been introduced in the U.S. House of Representatives to require companies that sell goods via the Internet and catalogs to collect sales tax in the same manner as “brick-and-mortar” retailers. The “Marketplace Equity Act” (MEA) is similar to the “Main Street Fairness Act” introduced earlier this year. Both bills would allow states to force retailers to collect sales tax from consumers even when the companies otherwise have no physical presence in that state.
The Main Street Fairness Act requires states to participate in the Streamlined Sales Tax Agreement, which sets uniform tax rules. To date, 24 states are full participants. In contrast, the MEA would set minimum federal rules and then allow states flexibility in establishing individual rules. The state would have three choices in selecting a tax rate—a single rate, a maximum state rate or a rate based on customer’s location. If the latter, the state would be required to supply tax software.
Both bills authorize a “small-seller exemption.” The Main Street Fairness legislation does not set a limit but instead defers to the Streamlined Sales Tax Agreement, which currently establishes a threshold of $500,000 and below. The MEA exempts companies from collecting sales tax if they have either less than $1 million in total sales or less than $100,000 in sales in a particular state.
Under a 1992 U.S. Supreme Court decision, states cannot force retailers to collect use taxes unless the company has a physical presence in the state (“nexus”). However, the Court also noted that Congress could pass legislation authorizing states to collect use taxes within the scope of interstate commerce. In lieu of the federal law, many states have expanded the definition of nexus in order to compel companies to collect taxes.
For more information, please contact Stuart Gosswein at stuartg@sema.org.