Apply Give Visit Find RSS feed Find us on Facebook LinkedIn Videos on Youtube Videos on iTunes Follow us on Twitter

Marketplace Fairness Act (Internet Sales Tax)

The House is considering the Marketplace Fairness Act of 2013 (S. 336), which the Senate passed with a 69-27 vote. The Act would allow member states to require “remote” sellers of goods exceeding $1 million per year to collect and remit associated sales and/or use taxes, provided the states meet the conditions of the Act.


Proponents argue the legislation would “level the playing field” between “bricks and mortar” retailers that collect sales tax on every purchase and the online retailers that currently do not collect sales taxes from out-of-state purchasers. The tax is politically attractive in that it is not a “new” tax, merely one that puts the burden of collecting the requisite sales or use tax on the retailer rather than asking the consumer to voluntarily track and pay her required use tax. One study estimated that states lost $52 billion in unpaid internet sales taxes from 2007-2012. (Payne, Selling, at 928) Also, state budgets are in deficit, with what little remains of the Stimulus funds running out. An interesting, if incomplete, counterargument maintains that over 50% of internet sales are made by “brick and click” retailers that already collect sales tax.


Opponents say the tax will hurt small businesses (which create jobs) and consumers who are already strapped. Some claim that internet retailers place less of a burden on state and local resources. E-Bay is lobbying for a small business exemption for sales of up to $10 million per year. Opponents argue that compliance would entail knowing thousands of different tax rates, something that the Supreme Court considered overly burdensome back in pre-internet days. Proponents argue that computer systems (similar to the ones that facilitate delivery logistics) can help the internet businesses comply with use tax requirements. States would also have to simplify the procedures by which companies remit tax payments, either through formal participation in the Streamlined Sales and Use Tax Agreement or by implementing specific procedures that would have a similar impact.

Use Tax

States began imposing use taxes in the 1930s. Ohio’s use tax became effective as of Jan. 1, 1936, to put “in state” businesses on par with out-of-state businesses. Within the last decade or two, Ohio has become more proactive about reminding individual tax filers to pay the use tax. Currently, citizens are supposed to pay a use tax on “transactions where sales tax was due but not collected by the vendor or seller” when they file their incomes taxes. The large increase in internet retailing during the last couple decades, along with the aforementioned state and local budgetary shortfalls, has encouraged states to rededicate efforts to collect use taxes on products bought from out-of-state companies. A proposed tax “Simplification Act” in 2007 “would have granted federal authorization to member states to require all sellers to collect and remit sales and use taxes for remote sales under the Streamlined Sales and Use Tax Agreement,” for retailers with taxable nationwide sales of $5 million or more. (Payne, Selling, at 941.)

Recent Developments

Major internet retailers and companies have had varying responses to state use taxes and the proposed internet sales tax. Google sought an exemption to being subject to California’s use tax, although Google has quite a “nexus” to California. At one point, Amazon argued that its Amazon Associates in New York state were merely providing advertising for Amazon, despite the fact the Amazon paid them a percentage of referred sales and a premium for referred customers who also signed up for Amazon Prime. In the past, Amazon also has tried to leverage its job creation impact to mitigate the tax implications when it sets up a “physical presence” (e.g. warehouse) in a state, another trigger that traditionally necessitates the collection of state sales tax in that state.

Nevertheless, Amazon now seems to be on board with an internet sales tax, and may even offer services to help other internet retailers comply with such legislation, if passed. A cynic may argue that, like established tobacco companies that may have actually benefited from the 1970 ban on cigarette advertising, Amazon may gain a competitive advantage over smaller competitors if an internet sales tax is passed. Large “brick and click” retailers that already charge sales tax (such as Walmart) would benefit, as well.

Supreme Court

The U.S. Supreme Court has ruled on the issue of whether or not companies have to collect out-of-state sales and use taxes in varying constitutional contexts over the years. In Nelson v. Sears, 312 U.S. 359 (1941), the Supreme Court held that it did not violate the Constitution or the 14th Amendment for Iowa to require Sears to collect tax on out-of-state mail orders shipped directly to purchasers in Iowa by mail or common carrier. In Scripto, Inc. v. Carson, 362 U.S. 207 (1960), the Court held that it did not violate the Commerce Clause or the Due Process Clause for Florida to levy a use tax on sales made by Scripto’s brokers in Florida, while all other aspects of such sales were handled in Georgia. In National Bellas Hess v. Dept. of Revenue, 386 U.S. 753 (1967), the Court held that Illinois was prohibited by the Commerce Clause from imposing a duty to collect use tax on a Missouri mail order company whose only connection with its Illinois customers was by mail or common carrier. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Court held that North Dakota’s “enforcement of the use tax against Quill places an unconstitutional burden on interstate commerce,” although the Court’s due process jurisprudence had evolved as to render the “physical presence in state” nexus no longer applicable. The Court also ruled that: ” [A] mail-order house may have the “minimum contacts” with a taxing State as required by the Due Process Clause and yet lack the “substantial nexus” with the State required by the Commerce Clause”; that the Bellas Hess standard was still “good law”; and that Congress may be better suited to resolve the issue. Congress unsuccessfully introduced similar fair-marketplace legislation in 2010 and 2011.

Selected Resources

Andrew T. Cannon. Where California Went Wrong with the Amazon Tax: Application of Due Process and Commerce Clause Jurisprudence to State Use Tax Collection Requirements Imposed on Out-of-State Internet Retailers. 39 Hastings Const. L.Q. 691 (2012).

Matthew D. Martin. Fair For Whom? Amazon Kindles the Fight over Internet Sales Tax. 46 John Marshall L. Rev. 357 (2012).

Michael J. Payne. Selling the Main Street Fairness Act: A Viable Solution to the Internet Sales Tax Problem. 44 Ariz. St. L.J. 927 (2012).

Maryann Gall and Laura Kulwicki. The Lawmaker’s Guide to Sales Tax Nexus. 30 J. State Taxation 11 (Nov./Dec. 2011).

Sam Zaprzalka. New York’s Amazon Tax Not Out of the Forest Yet: The Battle over Affiliate Nexus. 33 Seattle U. L. Rev. 527 (2010).

Carlton S. Dargusch and Darold L. Greek. The Ohio Use Tax. 2 L.J. Student Bar Ass’n Ohio St. U. 115 (1935-1936).