By Larry Jones
December 19, 2011

During a November 30 hearing on constitutional limitations on states' authority to collect sales taxes on e-commerce, government and business representatives told members of the House Judiciary Committee that the time has a come to level the playing field so merchants not physically located in a state (those who sell exclusively over the Internet or through mail-order sales) are subjected to the same tax collection requirements as merchants on Main Street.

In a joint letter to the Committee Chairman Lamar Smith (TX) and Ranking Member John Conyers (MI), the Conference of Mayors and other local groups urged support for a Senate proposal, the Marketplace Fairness Act (S. 1832), as a way of leveling the playing field. Recently introduced, this bipartisan legislation would authorize state and local governments to require Internet and mail-order companies to collect their sales taxes once they adopt the uniform simplifications standards outlined in the bill. The groups also expressed support for a House proposal introduced by Conyers, the Main Street Fairness Act (H.R. 20701). But they expressed strong reservations about another House bill, the Marketplace Equity Act (H.R. 3179). The reason is this proposal does not preserve local authority to collect sales taxes at their current rates. Instead, it could eliminate local sales tax rates altogether or allow states to set up a blended state-local rate.

er or allow states to set up a blended state-local rate.

Since the Bellas Hess decision in 1967 and the Quill decision in 1992, the Supreme Court has ruled that state and local governments only have authority to force companies that are physically located within their boundaries to collect their sales taxes. At the time of these decisions, the Supreme Court concluded it would be too complicated for out-of-state companies to collect all state and local taxes because they would have to become familiar with 7,000 different tax systems. But these decisions predate today's Internet and high tech environment, where software exists that would make all state and local taxes available to Internet and mail-order companies at the click of a mouse.

In the Quill ruling, the Supreme Court made clear that Congress had authority under the Commerce Clause of the Constitution to regulate commerce between the states and before any state can require an out-of-state company to collect its taxes, it must be granted authority to do so by Congress. Testifying on behalf of the Streamlined Sales Tax Governing Board (a group of 24 states that have worked with local government and business representatives to develop a uniform and simple way for Internet and mail-order sales companies to collect sales taxes), Indiana State Senator Howard Kenley III, said "I come before you today to ask you to exercise that authority."

Dan Marshall told members of the hearing panel that Marshall Music has been selling band and orchestra instruments since 1948 primarily through seven brick and mortar stores located throughout Michigan. The company had $18.5 million in sales last year, and five years ago it started selling items on eBay, which has reached $125,000 in annual sales. Marshall said customers come to his store to check out the music equipment "only to go home to purchase the item from an online retailer that does not collect the state sales tax."

He went on to say "Back home in Michigan, we have a state sales tax of six percent that is tacked onto every purchase. These funds that states use to keep our schools running and to make sure our communities stay safe. As a small business owner I would be happy if there was not a sales tax in the state, but I know that is not necessarily practical. But if we are going to pay for essential services with a sales tax, I want everybody to play by the same rules. Regardless of whether a sale occurs in a store or online, the sales tax should be the same. In a free market, government should not be giving one type of business an advantage over everyone else."