A Comprehensive Primer on the Marketplace Fairness Act
Tax Foundation explains everything you need to know about the MFA
Washington, DC (Jul 14, 2014)—The nonpartisan Tax Foundation has released a comprehensive primer on the Marketplace Fairness Act (MFA). This report offers an in-depth background and overview of the MFA and its alternatives, specifically addressing: the Quill physical presence rule, the Streamlined Sales Tax Project, state “Amazon” tax laws, the “hybrid origin-sourcing proposal, and proposed federal legislation.
The growing size of Internet retail and the resultant disparity in tax treatment between goods purchased online and those purchased at brick-and-mortar stores led the U.S. Senate to approve the Marketplace Fairness Act in 2013. This bill would give states limited additional authority to collect existing taxes, so long as the state adopts meaningful simplifications to their sales tax system.
The U.S. House of Representatives has yet to consider the bill, but its Judiciary Committee has recently engaged in a search for alternatives to the MFA approach. Thus far, the alternatives the committee has produced (such as a simplistic “hybrid origin-sourcing” approach) have been fraught with insurmountable problems.
“Keeping the sales tax up to date with the modern economy is important for the states and brick-and-mortar retailers, just as making multistate sales tax collection as seamless and simple as possible is important for Internet retailers and the national economy as a whole,” writes Joseph Henchman, Vice President of Legal Projects at the Tax Foundation.
Here are the key findings:
The Marketplace Fairness Act (MFA) would allow any state to require sales tax collection by out-of-state retailers, if the state simplifies its sales tax system.
Sales taxes are paid by consumers, but are usually collected and remitted by retailers at significant cost.
State taxation power is generally limited to individuals and businesses within the state’s borders, to prevent harm to the national economy from tax exporting.
Some states are nonetheless passing “click through nexus” statutes and demanding out-of-state retailers collect sales tax, leading to extended litigation and uncertainty. Other states are working with the Streamlined Sales Tax Project for greater tax uniformity.
A federal solution is needed and must allow states to collect sales tax on sales to their residents, eliminate unjustifiable tax distinctions between identical items, define the limits of state tax authority, and simplify the tax system to reduce compliance burdens.
The MFA bill is in this vein but would benefit from software compatibility requirements, a blended tax rate option, limits to state audit authority, and federal jurisdiction over disputes.
“Hybrid Origin-Sourcing” (HOS), while appealing in its simplicity, would require fundamentally restructuring how sales taxes work, confusing consumers and posing immense administrative and legal obstacles.
Because HOS allows states to tax consumers without minimum contacts with the state, it likely would violate the U.S. Constitution’s Due Process Clause.