Internet Sales Tax

Internet Sales Tax

This week the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair, which has major implications for legislation on how to address online sales taxes. The case challenges a 1992 decision that prohibited states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. As more commerce shifts to the online marketplace, this case and Congress’ reaction will have lasting impact on state and local government’s ability to collect billions in revenue.

There are two major pieces of legislation on this topic in Congress. The Marketplace Fairness Act (S. 976), introduced by Senator Mike Enzi, would undo the 1992 decision and give states the right to collect the sales and use taxes they are owed under current law from out-of-state businesses or online retailers. Currently, states are unable to collect these taxes on purchases from remote businesses so the tax is often not paid. Proponents of this legislation believe that this places local businesses at a disadvantage relative to out-of-state retailers. The bill allows any state that is a member of the Streamlined Sales and Use Tax Agreement to require remote sellers to collect state and local sales and use taxes and also includes an exception for small sellers. The bill has support from a range of local government groups such as the National Association of Counties, the National League of Cities, and the U.S. Conference of Mayors. The other major piece of legislation is the Remote Transactions Parity Act (H.R. 2193), introduced by Congresswoman Kristi Noem. The bill will allow states to require remote sellers to collect sales tax from the buyer, according to the taxes owed in the buyer’s location. It would also require states to provide free software to businesses located within their borders that would be capable of figuring the buyer’s tax rate.

While Congressional advocates of these bills are urging their colleagues to advance legislation prior the Court’s ruling, it is more likely that the Congress will only take action in response to the Supreme Court’s decision. Congresswoman Noem stated the Court’s consideration of the case demonstrated that “the need for legislative action on e-fairness is more urgent than ever before. If the Supreme Court rules in South Dakota’s favor, it could become a marketplace free-for-all.”