With individual filing season underway, it’s questionable how many taxpayers are aware of their use tax obligations, and actually track their Internet purchases during the year in order to accurately report and pay them.
There must be a few, but the majority of consumers either ignore their obligations, or make a guess on the extreme downside.
The impact of the economic downturn has been felt particularly hard at the state level, with many states operating under a deficit. Since taxes based on income don’t produce as much revenue during a recession as they do during good economic times, transaction taxes, including sales and use tax, become even more important to a state’s ability to fund its obligations. But many Internet sellers don’t collect the tax, and many Internet purchasers don’t report the corresponding use tax on their returns.
Which is why the there are currently three bills in Congress that seek to put the obligation for remitting the tax on the retailer rather than the purchaser.
The three—the Main Street Fairness Act, the Marketplace Equity Act, and the Marketplace Fairness Act—would generally allow states to require remote sellers to collect and remit sales and use taxes on remote sales. They all, to one degree or another, make reference to the Streamlined Sales Tax Agreement. This was a response to the 1992 Supreme Court decision in the Quill case, which held that a state cannot require out-of-state retailers to collect taxes from residents in states where the retailer has no physical presence, or nexus.
Of the three bills, the Marketplace Fairness Act is most likely to pass, according to Diane Yetter, president of Yetter, an indirect tax consulting service firm, and founder of the Sales Tax Institute.
“The Marketplace Fairness Act is bipartisan, and it merges elements of the other two proposed acts,” she said. “It doesn’t limit authorization to states that are members of the Streamlined Sales Tax Agreement. It also applies to other states that have implemented minimal simplification provisions.”
Legislation allowing states to collect tax from remote sellers was suggested as part of the congressional deficit reduction “supercommittee” recommendations to assist states in their budget crisis, Yetter noted. “But the failure of the supercommittee to reach a consensus precluded that,” she said.
While bills to allow states to collect from out-of-state sellers have been introduced in the past, this is the first time that three bills are before Congress at the same time, observed George Farrah, executive editor at Bloomberg BNA. “We consider that an indicator of momentum,” he said.
Another indicator of momentum, he said, is that in 2010 six states passed Amazon legislation. “It’s significant that in California, the state reached an agreement with Amazon not to enforce the legislation for a year in the event a solution could be worked out at the Federal level,” he said. “And the emergence of cloud computing has raised the issue of further erosion of states’ tax base, which will increase pressure for a federal solution.”
