Supreme court decision could provide small victory for internet sales tax enforcement: enacting the Marketplace Fairness Act would enable states to recover an estimated $23 billion owed in taxes on remote sales each year that could be dedicated to providing and improving essential public services such as infrastructure, education, health care, and public safety.

• Author: Berger, Barrie Tabin
• Position: Federal Focus

For the past several years, a priority legislative issue for the GFOA and other national associations that represent states and local governments has been the enactment of the Marketplace Fairness Act. (1) The act would remedy a remote sales tax collection loophole created by the U.S. Supreme Court's 1992 decision in Quill v. North Dakota by providing states and local governments the specific authority necessary to collect sales and use (2) taxes from out-of-state catalog and Internet vendors. Consumers already owe sales and use taxes on these purchases, in fact, but they are not being paid because consumers are unaware of their obligation to submit the tax. Enacting the Marketplace Fairness Act would enable states to recover an estimated $23 billion owed in taxes on remote sales each year that could be dedicated to providing and improving essential public services such as infrastructure, education, health care, and public safety It would also help level the playing field between Internet and catalogue mail-order companies, and "brick and mortar" Main Street retailers, which are currently at a 5 to 10 percent competitive disadvantage to remote sellers because Congress has not yet acted to update national tax laws to conform to the digital economy.

STATE SOLUTIONS

In the absence of federal action to close this tax collection loophole, states have sought their own solutions in order to protect their budgets, as well as their Main Street retailers. Twenty-four states have enacted streamlined sales and use tax agreements, whereby a state agrees to a simplified method of collection and remittance for remote sellers in exchange for the seller's commitment to collect and remit the tax. Other states have enacted "nexus" laws, which require remote sellers to collect and remit taxes based upon the relationship the remote seller has to some in-state entity performing certain work on its behalf.

Colorado developed its own initiative to improve its tax collection. In 2010, the Colorado legislature enacted a law requiring remote sellers to inform Colorado purchasers about their purchases annually and to send the same information to the Colorado Department of Revenue. Colorado intends to use the information reported to more accurately assess and collect the applicable use tax from its resident purchasers. According to the Internal Revenue Service, third-party reporting requirements are a proven method of tax collection where the taxing authority must...