What is “Main Street Fairness” or “Marketplace Fairness”?

Given the amount of media attention that the issue of “Marketplace Fairness” (formerly called Main Street Fairness) has attracted from Massachusetts media outlets (See recent articles published by Boston Globe, Boston Herald) I wanted to take this opportunity to explain what “Marketplace Fairness” is, and why it is an important issue.  In the interest of full disclosure, I am a member of the Massachusetts International Council of Shopping Centers (ICSC) Government Relations Committee, which is a strong advocate for Marketplace Fairness.  However, this blog entry expresses only my personal viewpoints and opinions, which may differ from the viewpoints and opinions of ICSC and/or Sherin and Lodgen LLP.

Marketplace Fairness refers to the movement for legislation to require remote (i.e., out of state) internet retailers to collect state sales tax in connection with sales made over the internet.  The movement involves the prospective passage of federal legislation (such as H.R. 3179: Marketplace Equity Act of 2011 or s. 1832: Marketplace Fairness Act) and state legislation (such as, in Massachusetts, Massachusetts House Bill 3673).  The need for such legislation can be traced back twenty years to the 1992 U.S. Supreme Court ruling in Quill Corporation v. North Dakota, where the Court ruled that remote internet and catalog retailers are exempt from laws requiring them to collect local or state sales taxes unless such retailers have a “nexus” in the state where the purchaser is located.  What constitutes a “nexus” is a complicated legal determination, although, generally speaking, a “nexus” is usually found to exist in situations where a given online retailer has a substantial physical presence, such as a store or warehouse, in the buyer’s state.  While the ruling affects both internet and catalog retailers, due to the dramatic increase in internet sales over the past 20 years, the focus of the movement is primarily on internet sales.  Advocates for Marketplace Fairness include ICSC, the Retailers Association of Massachusetts and the Main Street Fairness Coalition.

In Quill Corporation v. North Dakota, the Court found that requiring remote online retailers to collect state sales taxes created an unconstitutional burden, given the complexity and uniqueness of each state’s taxation system.  The exemption created by Quill Corporation v. North Dakota specifically relates to collection, not to the imposition of sales or use tax.  Thus, while few states have attempted to collect from consumers, state tax technically remains due on remote internet purchases where tax is not collected at the time of sale, and the burden to remit such taxes falls on the individual consumer.  In the decision, the Court noted that “Congress may be better qualified to resolve [the problem].”  However, in the 20 years since the ruling, Congress has failed to enact legislation that would require remote online retailers to collect state sales tax.  This has remained true despite the fact that many large internet retailers, such as Amazon, have actually supported such legislation, stating that “Amazon.com has long supported a simple nationwide system of state and local sales tax collection, evenhandedly applied to all sellers, no matter their business model, location or level of remote sale.”

To address the Court’s concern in Quill Corporation v. North Dakota about the unconstitutional burden of requiring online retailers to navigate the numerous, complex and diverse state sales tax systems, a simplified and uniform system has been proposed to assist with the easy administration and collection of sales and use tax for online purchases.  One version of this system is called the Streamlined Sales and Use Tax Agreement (SSUTA).  To date, 24 states have adopted the simplified, uniform sales tax system created by SSUTA, and many other states have indicated that they will do so if Congress passes legislation making the SSUTA the preferred solution.  In Massachusetts, for example, House Bill 3673 is presently pending in the Massachusetts legislature which, if enacted, will lead to the adoption of the SSUTA in Massachusetts.  However, because Marketplace Fairness involves interstate commerce, Congressional authorization is still needed in order for a state to require remote interstate retailers to collect sales tax for the online sale of goods to a resident of a given state.

Advocates of Marketplace Fairness often point out that the exemption created by Quill Corporation v. North Dakota has effectively created a subsidy system for internet retailers, which is unfair to retailers who do not derive substantial revenue from internet sales (often called “brick-and-mortar retailers”).  One of the most dramatic examples of this unfairness is illustrated in the book seller sector, where online retailers such as Amazon have thrived, while brick-and-mortar book sellers like Borders have gone out of business.  As a group, online retailers continually show double digit annual revenue growth, while brick-and-mortar retailers, many of whom are leaders in their respective local communities, continue to struggle.  It is also estimated that between $21.5 and 33.7 billion in nationwide state sales tax revenue is lost each year as a result of the exemption – with such losses occurring at a time when many states are facing some of the largest budget deficits in history.  Some also fear a “multiplier effect” if states attempt to mitigate budget shortfalls by further taxing brick-and-mortar retailers.  Advocates for Marketplace Fairness also note that in 1992, when Quill Corporation v. North Dakota was decided, the e-commerce industry was in its infancy.  Now, 20 years later, the industry has evolved to the point where it could handle the burden of collecting sales tax on purchases for different states, especially since pending legislation will likely create a uniform, simplified sales tax system.

Opponents of Marketplace Fairness view the elimination of the exemption created by Quill Corporation v. North Dakota as a de facto tax increase, which should be opposed on economic as well as ideological grounds.  Opponents also believe that the elimination of the exemption would unfairly affect home businesses and e-commerce businesses with only a few physical stores in a given state.  Opponents have stated that federal legislation would require online retailers to purchase costly new computer software to keep track of the different state taxation systems, and opponents see the elimination of the exemption as an unwanted government expansion into the private sector.  Opponents have also claimed that it is unfair to require online merchants to deal with the tax regulations of all 50 states, while local brick and mortar retailers are usually only required to keep track of the tax system in effect in the state where they are located.  Opponents have also claimed that brick-and-mortar retailers receive a disproportionate benefit from the payment of sales taxes, since their customers use the services supported by such tax dollars (such as state and local roads) to access stores.  While I won’t attempt here to rebut all of the opposition’s concerns, I will note that the two bills pending in Congress simplify the process to collect and remit sales tax by a remote seller and set exemptions for small retailers.

Before closing, I will note that the conversation about Marketplace Fairness in Massachusetts has recently been affected by Amazon’s decision to open an office in Cambridge and purchase the robot company Kiva Systems in North Reading.  It has not yet been determined whether Amazon’s actions are sufficient to create the “nexus” described by the Court in Quill Corporation v. North Dakota, which would require Amazon to collect sales tax on all internet sales involving purchasers in Massachusetts.  While such issue is being resolved, and presumably thereafter, proponents for Marketplace Fairness will continue to advocate for the passage of federal legislation and state legislation that will lead to a uniform requirement that all internet retailers collect state sales tax for internet sales, regardless of whether or not the retailer has an actual bricks and mortar location in the state.

More information on Marketplace Fairness can be found at the website of the Main Street Fairness Coalition and at ICSC’s website on this issue.