The misdirection starts with the name. The Marketplace Fairness Act isn’t about fairness at all. It’s about imposing the burden of calculating, collecting, reporting and remitting the consumer use taxes (sales tax) for all of the nearly 10,000 tax jurisdictions in the country onto merchants selling online regardless of whether the merchant has connections to the state and it’s taxing jurisdictions. The misdirection continues with the primary proponent of the Act, the Streamlined Sales Tax organization, putting their energy into political activism – getting as many states on board as possible – rather than on policy solutions that address the complexities and liabilities of the existing taxation landscape which are the primary obstacle to gaining the willing cooperation of online merchants.
The distortion begins with the myth that sales taxes and the collection, accounting and remittance of those taxes are somehow the responsibility of the merchant. Sales taxes are not the obligation of merchants. Sales taxes are a progressive form of consumption tax levied by the taxing jurisdiction on the consumer who purchases the taxable goods or services. Merchants have been conscripted into providing tax man collection services to the states and their taxing jurisdictions based on the theory that such a burden on merchants is warranted because the merchant also enjoys some of the benefits funded by the tax revenue. The distortion continues with the Streamlined Sale Tax organizations claim that software and aggregated state-by-state administration of the tax liabilities resolve the issues that the courts have previously ruled prohibit the imposition of tax man burdens on out-of-state merchants.
And the pig-headed attempt to extend the unquestioned sovereignty of every county, city, municipality, school district and the like to impose their own use tax rules and levies on out-of-state merchants perpetuates the administrative complexities and attendant liabilities and render this proposed Act to be unreasonable and economically destructive. On this point the Court has been explicitly clear.
In one of the first landmark decisions reigning in state efforts to shanghai merchants to serve as the tax man, the Supreme Court in National Bella Hess v. Department of Revenue (Illinois)1967 said,
“If the power of Illinois to impose use tax burdens upon National (Bella Hess) were upheld, the resulting impediments upon the free conduct of its interstate business would be neither imaginary nor remote. For if Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes. The many variations in rates of tax, in allowable exemptions, and in administrative and record keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose “a fair share of the cost of the local government.”
The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control.”
This issue has a long and substantial history in the courts. The impediments to the states hunger for taxation on sales made by out-of-state merchants has been challenged primarily on constitutional due process and interstate commerce grounds. In due process challenges opponents to the expansion of tax man duties on out-of-state merchants have argued that if a business has no meaningful presence in a state and therefore derives no meaningful benefit from carrying out the tax man responsibilities for the state that it would violate the merchants right to due process to require those merchants to shoulder the burden of such an onerous and complex task as this requirement would entail. The courts recognized the impact of technology and the evolution of sales processes such as mail and telephone order sales. As these sales processes grew and expanded the courts acknowledged and accommodated these changes in marketplace mechanics and finally in Quill V. North Dakota (1992) the courts overruled the due process objections holding that regardless of physical presence, when the merchant “purposefully directed its activities at North Dakota residents” and when the “magnitude of those contacts” is substantial that the protections of due process could be satisfied.
The Court however upheld the protections of the Commerce Clause (Article I, Section 8, Clause 3) blocking the imposition of tax man burdens on out-of-state merchants as “a means for limiting state burdens on interstate commerce.” The court went on to reaffirm the rule established in the Bella Hess case saying,
“The Bella Hess rule firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes. This benefit is important, for as we have so frequently noted, our law in this area is something of a “quagmire” and the “application of constitutional principles to specific state statutes leaves much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation.
Moreover, a bright line rule in the area of sales and use taxes also encourages settled expectations and, in doing so, fosters investment by businesses and individuals. Indeed, it is not unlikely that the mail order industry’s dramatic growth over the last quarter century is due in part to the bright line exemption from state taxation created in Bella Hess.”
The Court concluded by tossing the issue squarely on the doorstep of Congress concluding that
“Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes. Congress has the power to protect interstate commerce from intolerable or even undesirable burdens. “
Historically the Commerce Clause has been used in two broad ways – first, coupled with the Necessary and Proper Clause, it is used to extend the regulatory powers of the federal government into a vast array of laws concerning not only economic activity but civil liberties as well. The Commerce Clause was established and is also used to help ensure the smooth functioning of the national economy. It was in this regard that the Court referred the matter to Congress in it’s Bella Hess decision and it is on this basis that the Streamlined Sales Tax organization now seeks to employ Congress to impose the tax man burdens on out-of-state merchants. The appropriate referral of this matter to Congress cannot and should not be taken out of the context of Congress’ duty to ensure the smooth functioning of the economy and it is on this basis that the Marketplace Fairness Act fails to satisfy that demand.
The Streamlined Sales Tax organization has been at work preparing to bring this matter before Congress since 1999. In the intervening fifteen years only 21 states have become full members of the SST organization. Since its inception the SST organization has done little to lessen the” welter of complicated obligations” and “entanglements” of calculating, collecting, reporting and remitting sales taxes for the thousands of tax jurisdictions that the organization seeks to impose on out-of-state merchants.
Many of those who oppose the proposed Act have indicated that they are not opposed to the goal of the Act to collect these taxes; they are primarily opposed to the burdens and liabilities inherent in the administration of the vast landscape of current tax structures. Some opponents have suggested alternatives such as origin based taxation meaning that the sales tax would be based on the merchant’s location, not the buyers; or establishing a single rate at the state level thereby reducing the exposure and complexity to only 45 states who currently levy sales tax on purchases. This is where the Streamlined Sales Tax organization should have been spending its time and energy. There is long-standing recognition that requiring out-of-state merchants to assume the tax man responsibilities for all the various taxing jurisdictions is unreasonable and economically detrimental. The current approach embodied in the proposed Marketplace Fairness Act has not resolved those issues.