Another Take on Internet Sales Tax

Congress continues to look at the complications of collecting sales taxes for interstate transactions completed via the Internet.  Earlier we discussed the Main Street Fairness Act, which would require interstate sellers to collect and remit sales taxes to the states into which sales are made.  Our concern with that legislation was that it failed to define a “small seller exception.”  Although the Main Street Fairness Act would require certain small sellers be exempted, this legislation would give the states the authority to define exactly which businesses could qualify under the small seller exemption.


Recently introduced legislation would tackle the problem a bit differently.   The Marketplace Equity Act of 2011 (H.R. 3179) would allow a state to enforce collection of sales tax on sales made into its border from an out of state seller.  Unlike the Main Street Fairness Act, the Marketplace Equity Act would not require states to sign on to the Streamlined Sales and Use Tax Agreement (SSUTA) in order to enforce sales tax collection; states would only need to simplify their sales and use tax filing systems.  One method of simplification could be to adopt the SSUTA, but other simplification methods also could qualify.  The rationale is that certain states will never sign on to the SSUTA, so the Marketplace Equity Act would provide greater flexibility to all states as to how to solve the simplification requirement.


The Marketplace Equity Act does provide a very specific small business exemption.  It would exempt businesses with $1 million or less total remote sales or $100,000 or less remote sales into a single state.  While there might be some disagreement as to whether these exemption levels appropriately protect small businesses, the certainty of a specifically defined small business exemption is certainly preferred over the undefined exemption contained in the Main Street Fairness Act.


States continue to be concerned about the loss of sales tax revenues as online sales continue to grow, and this is a legitimate concern.  However, the solution to this problem should not force small businesses to abandon the Internet marketplace, which would result if all small businesses are required to collect and file sales and use tax returns with a multiplicity of states and jurisdictions; the compliance costs would just be too high.  For all businesses, and especially for small businesses, the cost of tax compliance is a major expense.  Adding additional compliance costs, especially in the current economic climate, would stifle many small businesses that are trying to stay afloat by marketing across state lines.