Legislation Introduced in Congress to Require Collection of Sales Tax by Online Retailers

Identical bills have been introduced in the U.S. House and Senate to require companies that sell goods via the Internet and catalogs to collect sales tax in the same manner as “brick-and-mortar” retailers. The so-called “Main Street Fairness Act” would recognize the “Streamlined Sales and Use Tax Agreement,” an ongoing initiative by state and local governments to address the collection of sales/use taxes. The agreement creates a system for companies to register with member states, collect and remit taxes and file one tax return for each state. To date, 44 states have worked to create the agreement and 24 states are participating members.

Most states collect sales and use taxes. The term “sales tax” generally refers to in-state sales while “use tax” applies to personal property purchased by an out-of-state resident. Sales/use taxes are due from the consumer but in most cases these taxes go uncollected. Under a 1992 U.S. Supreme Court decision, states cannot force retailers to collect use taxes unless the company has a physical presence in the state (“nexus”). However, the Court also noted that Congress could pass legislation authorizing states to collect use taxes within the scope of interstate commerce. In lieu of the federal law, many states have expanded the definition of nexus in order to compel companies to collect taxes.

The federal legislation would treat all sales transactions in a state equally regardless of whether the sale was completed in-person, through the mail, over the phone or over the Internet. Small-seller retailers would be exempted, although the bill does not reference a sales threshold. The issue of whether a seller has nexus for any other state taxes (e.g.: business activity tax) is outside the scope of this bill.

For more information, contact Stuart Gosswein at stuartg@sema.org.