The nation’s governors call on Congress to help states modernize sales tax systems and encourage greater marketplace competition by taking up and passing legislation like S. 1832, the “Marketplace Fairness Act.”
The Marketplace Fairness Act, along with similar bills such as the “Marketplace Equity Act” (H.R. 3179) and the “Main Street Fairness Act”, (S. 1542 and H.R. 2071), would remove the barrier preventing states from collecting sales taxes in exchange for states simplifying their sales tax laws. For states, this represents the opportunity to collect more than $23 billion in foregone sales taxes incurred by consumers each year, but cannot be collected.
This collection gap was created by decades-old U.S. Supreme Court rulings in National Bellas Hess v. Illinois, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992), where the Court held that, absent Congressional authorization, no state may require a seller to collect tax on sales into the state if the seller lacks a physical presence in the state. As a result of that barrier, local brick-and-mortar stores required to collect the tax operate at a competitive disadvantage with remote sellers that do not. Local stores find themselves serving as showrooms for the same products sold by Internet and catalog sellers. Prospective customers examine the merchandise locally then buy the product online or through a catalog to avoid paying sales tax.
To address this problem, the National Governors Association (NGA) and the National Conference of State Legislatures initiated the Streamlined Sales and Use Tax Project (Project) in the fall of 1999. The Project, in turn, generated the Streamlined Sales and Use Tax Agreement (SSUTA), a cooperative effort by the business community, states and local governments to simplify sales and use tax collection and administration. The SSUTA reduces costs and administrative burdens on retailers operating in multiple states. In return, those retailers voluntarily collect tax on sales to customers living in states that comply with the SSUTA.
To date, more than 1,700 retailers have volunteered to collect sales tax in Streamlined states and have remitted more than $900 million in sales taxes that would previously have gone uncollected. This amount, however, pales in comparison to what could be collected under a nationwide system authorized by Congress through federal legislation.
NGA supports congressional efforts to remove the current barrier to the collection of sales tax, help small businesses expand and assist consumers through fair competition.
For states, the legislation would help reverse the erosion of states’ sales tax base due to increasing internet sales. States closed budget gaps of $325 billion from fiscal years 2009 through 2012 and will continue to face gaps for fiscal year 2013. Rather than asking for one-time relief, which the federal government cannot afford and states do not seek, S. 1832 provides a common-sense structural solution that will strengthen states’ fiscal condition without adding to the federal debt.
For business, it means that the corner store is on the same footing with the online retailer. In other words, the local sporting goods store that employs our neighbors and sponsors the little league team has the same requirement to collect sales taxes as the online merchant. It also means that corner store can grow its business more easily. Simplified tax requirements and the availability of easy to use technology make doing business easier by reducing risk and creating opportunity.
The legislation also helps consumers. Fair competition means more choice. The success of electronic commerce should not mean the death of Main Street. Instead, our laws should set the stage for all businesses to compete and succeed.
NGA calls on Congress to take up the proposals pending before it and move ahead with legislation that will modernize the state sales tax system and bring it into the 21st century. Specifically, NGA recommends that several core elements be part of any bill.
First, federal legislation must clearly authorize states to require the collection of sales and use taxes on sales of taxable products and services into their jurisdictions by remote sellers. More important, since authorization is tied to meeting certain simplifications, the legislation should recognize the efforts of states that are compliant with the SSUTA by granting them the authority to collect immediately. If an alternate path is offered for non-SSUTA states, the requirements must be clear to avoid litigation when a state makes changes to gain collection authority.
Second, the legislation should include a de minimis or small business exception that exempts qualifying businesses from the collection requirements. While governors have never specified a level for the small business exception, the size of the exception should be sufficient to relieve the smallest businesses from collection responsibility, but small enough to ensure the exception does not swallow the rule. Any exception will preserve a portion of the tax collection gap states are working to close. NGA encourages Congress to set a low small business exception while allowing states to increase the exception as appropriate.
Third, the legislation should not dictate rates or mandate the imposition or elimination of sales taxes. Our federal system depends on states retaining the responsibility and authority to manage their taxing policies to meet fiscal requirements. Unless states retain flexibility in conforming to any simplification requirements, they cannot properly ensure the efficiency and administration of the resulting tax system.
Fourth, governors strongly oppose any suggestion that sales tax collection authority be combined with limits or restrictions on state taxing authority in other areas. For example, bills such as the Business Activity Tax Simplification Act (H.R. 1439) are antithetical to efforts by states to modernize their tax systems because they seek to revert back to a “physical presence” standard from which state sales taxes are trying to evolve. Federal legislative proposals like H.R. 1439, which would effectively reduce state taxes through federal legislation, should not be combined with Marketplace Fairness as the ‘cost-of-doing-business’ for modernizing state sales tax systems.
The time has come for Congress to join with states to improve our laws and ensure government is not picking winners and losers in interstate commerce. S. 1832 represents thoughtful structural change that will help bridge the gap between the physical economy of the 20th century and the digital economy of the 21st century. We encourage the committee to support efforts to pass legislation this year to promote competition and level the playing field for all retailers.