Trends in Sales and Use Tax for Remote Sellers

By Jamie C. Yesnowitz, J.D., LL.M., Washington, D.C.; Chuck Jones, J.D., CPA, Chicago; and Hannah Yoo, J.D., Chicago

Editor: Greg A. Fairbanks, J.D., LL.M.

State & Local Taxes

Click-through or affiliate nexus legislation has become a popular way for states to require certain remote sellers (i.e., internet vendors) to collect sales or use tax on their sales to in-state residents. Click-through nexus legislation typically establishes nexus or a presumption of nexus where a remote seller pays a commission to an in-state resident for referrals that result in a certain threshold of sales to in-state customers. Affiliate nexus legislation typically establishes nexus or a presumption of it where the remote seller’s in-state affiliate performs certain activities that benefit the remote seller.

The rationale behind such legislation is that internet vendors should not have a competitive advantage over brick-and-mortar stores. While the customer is legally obligated to self-assess the appropriate use tax due on an internet transaction, in reality, the customer is often unaware of this obligation, and its enforcement is inconsistent and relatively rare. State tax authorities find it impractical to devote their personnel to individual audits, and attempts to audit individual consumers’ use tax compliance face privacy concerns. Therefore, states are concerned, especially in light of their budget crises, that they are not receiving the proper amount of tax due on sales to their residents.

Since 2008, following New York’s lead, the following states have enacted or implemented click-through nexus rules: Arkansas, California, Connecticut, Georgia, Illinois, North Carolina, Pennsylvania, Rhode Island, and Vermont. For Vermont, the legislation goes into effect if and when 15 or more other states have enacted similar legislation.

The states that have enacted affiliate nexus legislation or implemented affiliate nexus rules are Arkansas, California, Colorado, Georgia, Illinois, New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, and Virginia (effective Sept. 1, 2013).

While the trend to enact click-through or affiliate nexus legislation continues, it is unclear whether remote seller collection requirements violate the Due Process and Commerce Clauses of the U.S. Constitution. Based on long-standing constitutional law, a state cannot overextend its reach by taxing sellers that have very little or no connection to the state aside from making sales to residents there. Moreover, in Colorado and Illinois, courts have found constitutional violations in remote seller nexus legislation ( Direct Marketing Ass’n v. Huber , No. 10-cv-01546-REB-CBS (D. Colo. 3/30/12); Performance Marketing Ass’n, Inc. v. Hamer , No. 2011 CH 26333 (Ill. Cir. Ct. Cook Cty. 5/7/12)).

But the fact remains that constitutional law and legal precedent do not directly address the changing retail landscape. Furthermore, the U.S. Supreme Court has held that only Congress has authority to regulate interstate commerce under the Commerce Clause (Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824)). As a result, retailers and states alike are awaiting congressional action to settle the issue.

Federal Bills to Impose Remote Seller Collection Requirements

In 2011, the U.S. House and Senate each introduced two bills to allow states to impose remote seller collection requirements if certain simplification requirements are met. On July 29, 2011, both chambers introduced identical bills called the Main Street Fairness Act (S. 1452 and H.R. 2701). On Oct. 13, 2011, the House introduced the Marketplace Equity Act (H.R. 3179), and on Nov. 9, 2011, the Senate introduced the Marketplace Fairness Act (S. 1832). Whereas the Main Street Fairness Act bills are identical, there are some notable differences between the House’s Marketplace Equity Act and the Senate’s Marketplace Fairness Act. Although the 112th Congress adjourned without enacting any of these bills, given the ongoing nature of the problems they address, they or similar legislation is likely to be reintroduced in the current session.

The Main Street Fairness Act

The Main Street Fairness Act would allow any Streamlined Sales and Use Tax Agreement (SSUTA) member state (see to require a remote seller with no physical presence in the state to collect that state’s sales or use tax on sales of both taxable goods and services into the state. The bill lists 18 minimum simplification requirements for the SSUTA and its implementation by member states. They include a centralized, multistate registration system that a seller may elect to use to register with the member states and that a seller must be able to register directly with a member state. Each member state must establish a single state-level administrative authority for sales and use taxes; maintain a common tax base throughout the state; eliminate caps and thresholds on the application of sales and use tax rates; complete a taxability matrix; relieve a remote seller from liability resulting from the seller’s reliance on certain information provided by the member state; and compensate sellers for expenses incurred directly from administering, collecting, and remitting sales and use taxes to the member state.

The SSUTA must contain uniform provisions for (1) definitions of products and product-based exemptions; (2) rules for sourcing transactions to particular taxing jurisdictions; (3) procedures for certification of software service providers that a seller can use to determine appropriate rates and tax treatments of sales; (4) rules for bad debts and rounding; (5) requirements for tax returns; (6) electronic filing and remittance methods; and (7) rules and procedures for sales tax holidays and refunds/credits as well as shipping and handling charges. Perhaps most important, the SSUTA must contain a uniform rule to establish a small-seller exception to the remote seller collection requirement. The bill itself does not determine the small-seller exception; rather, the SSUTA must determine it.

In addition, the bill does not require a single sales and use tax rate per taxing jurisdiction on items of personal property or services. Although the SSUTA currently requires a single rate per jurisdiction, absent federal legislation to the contrary, the agreement’s national administrator, the Streamlined Sales Tax Governing Board, can always eliminate this requirement.

It is far from a simple task for a state to comply with the bill’s 18 simplification requirements. Compliance difficulties, along with the fact that the bill applies only to member states, may explain the lack of support for this bill. Nonetheless, if the bill is reintroduced and enacted, it would go into effect on the first day of the calendar quarter that is at least six months after the date the Streamlined Sales Tax Governing Board determines that its member states are in compliance with the bill’s provisions.

Marketplace Equity Act

The House’s Marketplace Equity Act would allow all states (both member states and nonmember states to the SSUTA) to require remote sellers of both taxable tangible personal property and services to collect and remit sales and use tax if the state implements a simplified system for administering remote seller collections. The state would be required to meet the following simplification provisions: (1) There must be a small-seller exception for remote sellers with gross annual receipts in the preceding calendar year from remote sales of items, services, and products in the United States not exceeding $1 million or in the state not exceeding $100,000 (states are permitted to set higher thresholds); (2) the state must provide a tax return for use by remote sellers and a single revenue authority within the state with which remote sellers are required to file the return; (3) for remote sellers, the products and services subject to tax must be identical throughout the state; and (4) the state must require remote sellers to collect sales and use tax under one of three rate structures: (a) a single statewide blended rate that includes both the state rate and applicable rates for local jurisdictions, as determined by the state; (b) the maximum state rate, which is the highest rate at which sellers are required by the state to collect tax, exclusive of local taxes; or (c) the applicable destination rate, which is the sum of the state rate and any applicable rate for the local jurisdiction into which the sale was made.

A state could not require that remote sellers submit any other sales and use tax return than the return applicable to remote sellers, and a remote seller could not be required to file returns any more frequently than returns required for other sellers. Also, no local jurisdiction could impose additional return filing or collection requirements. With respect to the products and services sold by remote sellers, any exemptions must be identical throughout the state and may not exempt products and services of nonremote sellers.

If the bill is reintroduced and enacted, states that satisfy the above simplification requirements could begin to collect sales tax from remote sellers on the first day of the calendar quarter at least six months after the state publishes a notice that contains specified information.

The Marketplace Equity Act was designed to provide a “simple framework” that is not linked to the SSUTA and has fewer requirements than the Main Street Fairness Act. Presumably, the states that are not members of the SSUTA find this alternative proposal more appealing, since it provides states with more discretion in implementing the provisions.

Marketplace Fairness Act

The Senate’s Marketplace Fairness Act, like the Marketplace Equity Act, would grant all states the authority to enforce existing state and local sales and use tax laws. However, SSUTA member states and nonmember states would be treated differently. Member states would simply be allowed to require remote retailers to collect state and local sales and use taxes on their sales of taxable goods and services.

Nonmember states would be able to set the same requirement so long as they adopted a number of minimum simplification requirements: (1) There must be a single state-level agency to administer all sales and use tax laws, a single audit, and a single return; (2) there must be a uniform sales and use tax base among the state and local taxing jurisdictions; (3) the collection of taxes must be based on the destination rate; (4) the nonmember state must (a) provide software and services to remote sellers and third-party providers to help them identify the destination rate; (b) provide certification procedures to providers to make the software and services available to remote sellers; and (c) hold providers harmless for errors or omissions due to information provided by the state; (5) the nonmember state must hold remote sellers using a provider harmless for any errors and omissions made by that provider; (6) the nonmember state must allow for liability relief (including penalties and interest) for tax collection errors that are due to a remote seller’s reliance on information provided by the state; and (7) the nonmember state must provide remote sellers and providers with 30 days’ notice of a local rate change. Local rate changes could become effective only on the first day of a calendar quarter. If a nonmember state failed to provide 30 days’ notice of a local rate change, the state must hold a remote seller or provider harmless for collecting the tax at the immediately preceding effective rate during the 30-day period prior to the effective date of the new rate.

Like both the Main Street Fairness Act and the Marketplace Equity Act, there is an exception for small sellers, those with less than $500,000 in annual nationwide remote sales. Such remote sellers could not be required to collect sales and use taxes. This has stirred some controversy because it is arguably more rational to have a state-by-state sales threshold to be deemed a small seller. As it stands, a seller that makes $499,999 of annual remote sales into a single state would qualify for the exception, whereas a seller who makes only a small amount of annual remote sales into any particular state (for example, $20,000) may be within the reach of the state’s authority to require collection if the total annual re mote sales amount to $500,000 or more.

In a sense, this proposed legislation is a hybrid of the two bills that were introduced earlier in 2011 and appeared to have the most momentum.

Comparison of the Bills

All three bills had bipartisan support and specify that they do not permit states to assert that a remote seller has nexus for any type of tax other than sales or use taxes. All three bills also contain a severability clause, which states that if certain provisions are held to be unconstitutional, the other provisions are unaffected.

While the House’s Marketplace Equity Act defines the terms “sales tax” and “use tax,” the Main Street Fairness Act and the Senate’s Marketplace Fairness Act do not. Defining these terms is significant because it allows for the fact that some states (e.g., Illinois) do not have a local use tax; they source sales tax on the origin of the product rather than the product’s destination.

Support for Federal Legislation

Federal legislation is supported by big players in the internet sales arena, such as the Performance Marketing Association, the Retail Industry Leaders Association, Best Buy, Wal-Mart, and even the online retail giant Such support may stem from the acceptance that a collection requirement is inevitable, as well as the recognition that nonuniform state legislation creates confusion and complicated compliance demands.

Opposition to Federal Legislation

Online auction site eBay leads the opposition to federal legislation, taking the position that the small-seller exceptions are inadequate to protect small businesses against the burdens of a collection requirement. EBay has indicated support for basing a small-seller exception on the definition of a small business used by the Small Business Administration (approximately $30 million in annual gross receipts) .

Google and Yahoo, as well as a number of technology trade groups, have also expressed opposition. These groups believe implementation (i.e., software automation and training for staff) would be costly and burdensome for small online businesses.


In a press release, Sen. Dick Durbin, D-Ill., sponsor of the Main Street Fairness Act and a co-sponsor of the Marketplace Fairness Act, stated that in 2012 states would lose an estimated $24 billion in sales or use taxes owed on online sales. This lost revenue is a growing concern for states and brick-and-mortar stores that desire a level playing field. Congressional action on this issue may not be immediately forthcoming, particularly in light of the disputes and objections to the small-seller exception. In the meantime, states may continue the trend of enacting click-through or affiliate nexus legislation to reach sales by remote internet vendors.


Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, D.C.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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