U.S. Senate passes Marketplace Fairness Act

The U.S. Senate last month passed a bill that would require retailers to collect local and state sales taxes on online purchases based upon the shipping address provided by the customer.

Under current law, online retailers are only required to collect sales taxes in jurisdictions where they have a physical presence. Massachusetts residents who make online purchases are supposed to remit to the state a “use tax” equivalent to what the sales tax would have been as part of their annual income tax filing, but this is rarely done by customers or enforced by the state.

The Marketplace Fairness Act would require states to simplify components of their sales tax code in order to participate in the program, and to create software for sellers to use in calculating their sales tax rate.

The act’s proponents, including the National League of Cities and the MMA, contend that it would level the playing field for brick-and-mortar retailers, who must collect sales taxes, which currently puts them at a competitive disadvantage with online sellers. The act would also allow states to capture revenue that is currently off-limits, a growing concern as the online marketplace becomes increasingly robust. The Washington Post estimates this lost sales tax revenue at $11 billion per year nationwide.

Opponents contend that the legislation would place an undue burden on online retailers and that the collection process would be prohibitively complex.

The legislative proposal would exempt online retailers with annual out-of-state sales of less than $1 million from the requirement to collect sales taxes from customers in other states. And each state would have the authority to decide whether to enforce the provisions of the legislation, meaning that any state could choose not to require sales tax collection by online retailers.

The legislation is a response to a recent U.S. Supreme Court ruling that online retailers cannot be compelled, under current law, to collect sales taxes from purchasers in states where the retailer does not have a physical presence, because only Congress can regulate interstate commerce. Additionally, the court ruled that collecting sales taxes from customers residing in more than 9,000 tax districts nationwide would be overly burdensome for online retailers.

The bill now goes to the U.S. House of Representatives, where Speaker John Boehner has said he is unlikely to support it, citing the compliance burden for online retailers.

President Barack Obama has indicated that if bill passes, he would sign it into law.