Post by Mark W. Siler
Since 1992, the question of whether a state could require a business to collect and remit sales tax has been governed by the United States Supreme Court’s ruling in Quill v. North Dakota, 504 U.S. 298 (1992). Bills being considered by both houses of the United States Congress may change that for certain remote sellers.
Under Quill, a business must have a certain minimum contacts with a state in order for a state to be allowed to require that business to collect and remit sales tax to the state. Since Quill was decided, businesses have generally operated under the impression that such minimum contacts required the business to have a physical presence in the state seeking to enforce its tax laws. There are open questions regarding what constitutes a physical presence for a business, however, it is well established that a remote seller who does nothing more that advertise via catalogs, flyers and telephone calls and delivers products into a state via common carrier does not have nexus for the purpose of sales tax enforcement. This physical presence requirement has been extended to remote sellers who advertise their products via the internet. If bills in front of both houses of the U.S. Congress pass, this physical presence test will no longer apply to most remote sellers.
The United States House of Representatives is considering the Marketplace Equity Act of 2011 (H.R. 3179) and the United States Senate is considering the Marketplace Fairness Act (S. 1832). Both bills have bi-partisan sponsors. The reasoning behind the bills is the desire of the two houses to level the playing field between brick and mortar stores and remote sellers. This is because remote sellers who are not required to collect and remit sales tax are gaining a competitive advantage due to their ability to charge less for their products because the prices of those products do not include tax. The bills would give states significant freedom in drafting their laws concerning collecting sales taxes from remote sellers who make sales of products which are shipped into the state, regardless of the location of the seller. The impact of these bills will be far-reaching. While there are exemptions for certain small sellers, ($100,000 per state and $1,000,000 nationally under the House bill and $500,000 nationally under the Senate bill), there is nothing limiting the bills’ collective impact to internet sellers. Therefore, any laws passed by states may also impact brick and mortar sellers who also happen to sell their products remotely via catalog or other advertising method.
The effect of the bill would be to make physical presence irrelevant for purposes of determining whether a business has nexus for sales tax purposes. However, an interesting quirk of both bills is that they only impact nexus for sales tax purposes and do not impact nexus with respect to any other tax such as income or franchis e taxes. This may create record keeping issues for both remote sellers and states.
Overall, it is important to note that neither of these bills is the law and, assuming they each pass their respective house, there will be a conference committee that hammers out exactly what the new law will include. However, it is becoming more and more likely that remote sellers will face new sales tax collection and reporting requirements in multiple states in the coming years. Stay tuned for further updates.