As sales tax base erodes, governors voice support for Market Fairness Act

State leaders joined together on Wednesday to voice support for the Market Fairness Act which calls for online retailers to collect state sales taxes on goods purchased online, something they are not required to do because of a 1992 Supreme Court ruling.

According to the National Governors Association and the National Conference of State Legislators, the legislation “upholds the principles of federalism and levels the playing field between Main Street and e-street.”

“This has long been a priority issue for the nation’s governors,” said NGA Executive Director Dan Crippen. “This bipartisan legislation seeks to reverse federal intrusion into state tax authority and keep jobs in our communities and bring much needed revenue to strained state budgets across the United States. The Internet has spurred our economy and increased choice, but it does not need a subsidy—it needs to follow the rules like everyone else.”

The current bill – the Marketplace Fairness Act of 2013 – was introduced on February 14 in the U.S. Senate and the House. It was introduced a second time in the Senate on April 16, 2013, and was passed there on May 6. All three bills are virtually identical and would allow states to require online and other out-of-state retailers to collect sales and use tax.

Each state in the United States may impose a sales tax on products or services sold in that state. Some states impose a sales tax while some do not, but each state may set the rate and scope (products taxed) of the sales tax.

Within each state, counties and cities may have different sales tax rates and scope, resulting in many different rates based on the location of the point of sale. The states allow (or require) the seller to itemize and collect the tax from their customers at the time of purchase. Most jurisdictions hold sellers responsible for the tax even when it is not collected at the time of purchase.

Residents of the 45 states with sales and use tax must pay tax on their online purchases. However, according to the Supreme Court rulings in “National Bellas Hess v. Illinois” (1967) and “Quill Corp. v. North Dakota” (1992), retailers, including catalog and online sellers, only need to collect sales and use tax for states where they have a physical presence.

If an online retailer does not collect sales or use tax at the time of purchase, the consumer must pay the tax due directly to the state.

According to the NGA, state and local governments fail to collect more than $23 billion from transactions conducted over the Internet or through catalogues each year.

States cannot compel sellers, who do not have a physical presence in the state, to collect the sales tax without federal legislation.

The growth of electronic commerce – more than 10 percent annually – means state sales tax bases are eroding and increasing state reliance on other revenue streams.

“State legislators have been champions of the Marketplace Fairness Act since its inception nearly ten years ago,” said NCSL Executive Director William Pound. “Legislators know the importance of maintaining the viability of Main Street businesses, and that’s exactly what this legislation accomplishes. After the Senate’s strong bipartisan support, and with the president committed to signing the bill, we’re counting on the House to carry us over the finish line.”