The Marketplace Fairness Act is going to be voted on this week in the US Senate – legislation that would give states the authority to require most online and other remote retailers to collect sales taxes, in exchange for states simplifying their sales tax systems.  In the United States, when someone purchases a product from a brick-and-mortar store, they usually pay sales tax where if they buy the same product from an online retailer they do not pay sales tax.  In 2009, North Carolina passed the “Amazon” tax to collect sales tax from online retailers.  This decision was contradictory to federal law and cause a lot of questions, which John Locke details in this detailed report.  On the federal level, Tax Foundation’s Joseph Henchman testified before Congress about this bill last year, here are some of his comments:

States were not permitted to tax items in interstate commerce at all, from the founding of the country until approximately the 1950s. Since then, as formally adopted by the U.S. Supreme Court in the Complete Auto decision (1977), states may tax interstate commerce so long as the tax is non-discriminatory, fairly apportioned, related to services, and applies only to businesses with substantial presence (nexus).

In a series of decisions, most recently the Quill decision of 1992, the U.S. Supreme Court explained that “substantial nexus” for sales/use tax purposes means physical presence of property or employees. The Court ruled that it exceeds to state powers for them to be able to demand use tax collection from companies that are not physically present in the state. States have sought to overrule the Quill decision, either legislatively (“Streamlined”) or through defiance (“Amazon” tax statutes). The defiance approach in particular has caused significant disruption and uncertainty to the economy. The “lost” revenue for states from untaxed Internet transactions is somewhere around $3 billion nationwide.

While Congress debates and votes on this bill they have a few options that deal specifically with the physical presence rule.  Do they reaffirm the difference between brick-and-mortar and Internet sales?  Do they create a new tax, such as an origin or national online sales tax?  Do they repeal the physical presence rule and allow states to do as they please and risk damaging interstate commerce?

Last month this bill (S 743) was added as an amendment to the Senate’s FY 2014 budget resolution by a vote of 75-24.  The budget resolution does not have the strength of a law, the fact it passed by such a large majority showed generous support.  This also cued President Obama to publicly support the bill.  If the Senate passes the bill this week, it will move to the House, where the outcome is more uncertain.