Online retailers’ tax-free days are numbered

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Are we approaching a time when Internet sellers will be required to collect sales tax on all sales in the same way brick-and-mortar retailers do? It appears the issue is alive again following two related events that came down last month.

First, in a surprising announcement, U.S. Supreme Court Justice Anthony Kennedy said that the court got it wrong 23 years ago when it handed down its landmark ruling that left most Internet purchases free of sales tax. Moreover, he boldly invited opponents to file a case that would let the court correct its mistake.

In essence, Justice Kennedy believes changes in technology and consumer sophistication make it wise to reconsider the court’s ruling. “The legal system should find an appropriate case for this court to re-examine Quill,” he said. (His reference: Quill v. North Dakota, 1992). Of particular note here is that decision was handed down in 1992 during what was really just the start of the Internet age. So in that ruling the justices actually relied on a 1967 case involving old mail-order firms.

What triggered Kennedy’s comments now is a unanimous ruling by the justices that federal courts should hear a lawsuit by the Direct Marketing Association against a Colorado sales tax law. Interestingly, that law doesn’t require out-of-state retailers to collect sales tax from Colorado customers, but it does mandate that all untaxed purchases be reported to state tax authorities. Thus, the state can go after the customers for the tax money.

Meanwhile, on March 10, Sens. Mike Enzi, R-Wyo., and Dick Durbin, D-Ill., along with seven other co-sponsors, introduced the Marketplace Fairness Act of 2015. It’s very similar to previous bills in that it would allow states to require remote sellers to collect and remit sales and use taxes on sales to in-state customers under certain conditions.

That said, it’s important to recall there was a Marketplace Fairness Act of 2013. That one actually passed the Senate in May 2013 with overwhelming bipartisan support. The vote was 69-27. However, it never moved in the House of Representatives and, therefore, died at the end of the congressional session last December. Things are changing now.

The new House Judiciary Committee chairman Robert Goodlatte, R-Va., and Oversight and Government Reform Committee chairman Jason Chaffetz, R-Utah, are both reportedly working on legislation. They indicate their bills will build on that 2013 legislation that passed the Senate and would have allowed states to require online sellers to collect sales tax whether they had a physical presence or not.

Finally, while it would appear there is significant movement toward some resolution to this long-discussed issue, it’s must be recognized that in the last 12 years, similar legislation has been introduced in every session of Congress. Obviously, nothing is assured.

Still, when the Senate passed its bill in 2013, it was the first time a binding measure passed either the House or Senate. That’s very big because it establishes an advanced base from which to move legislation in this Congress that could end tax-free clicks where online sellers have a tax advantage over local stores. For the first time, it seems more likely than not.


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