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DMA opposes burdensome and unrepresentative taxes and administrative collection requirements on remote sellers. DMA works in both Congress and the States on these issues. DMA has faced and is facing five separate tax issues: 1) collection of sales and use taxes by remote sellers; 2) use tax notice laws; 3) business activity taxes; 4) Internet access taxes; and 5) affiliate nexus taxes.
Collection of Sales and Use Taxes by Remote Sellers
The Marketplace Fairness Act of 2013, often referred to as the Internet sales tax, requires all “remote sellers” (including online stores) doing $1 million or more in sales to collect taxes for every state and jurisdiction where they have customers. The Supreme Court’s ruling in Quill expressed concern about the difficulty of collecting sales tax in multiple states and established a physical presence standard. But as the Marketplace Fairness Act stands now, Congress is seriously considering removing that constitutional protection in the interest of interstate commerce emphasized in Quill. The legislation would require all e-commerce websites and catalogs to: calculate tax rates for 9600 tax jurisdictions, file returns for each of the 46 taxing states, endure potential tax audits from 46 state tax authorities, and invest in computer systems changes and additional accounting resources.
As part of the True Simplification of Taxation (TRuST) coalition, DMA strongly opposes the Marketplace Fairness Act in its current form. DMA, along with TRuST, believes that Congress should not overturn the physical presence standard in Quill without first requiring by statute the simplification of sales and use taxes within the states, as well as simplification of the administrative requirements for the collection and auditing of those taxes.
Use Tax Notice Laws
In March 2010, Colorado’s state legislature enacted a use tax notification law that requires certain out-of-state retailers to: 1) notify customers of their use tax obligation, 2) provide an annual summary to customers who spent more than $500 during the previous calendar year, and 3) report this summary to the Department of Revenue. DMA challenged the Colorado Department of Revenue in federal court in response to these notice and reporting requirements.
In March 2012, U.S. District Court Judge Robert Blackburn granted DMA a permanent injunction, preventing Colorado from enforcing the law. Judge Blackburn asserted that it placed an “undue burden on interstate commerce.” The Colorado Department of Revenue appealed this decision to the Tenth Circuit Court of Appeals. The appeals court ruled in late August that the Tax Injunction Act (TIA) prevents the federal district court from having jurisdiction in this suit. The TIA maintains that “district courts shall not enjoin, suspend, or restrain the assessment, levy, or collection of any tax under State law where a plain, speedy and efficient remedy” can be settled in lower courts. This ruling merely concerned whether or not the federal district court had jurisdiction over the case, with the Court not even reaching the merits of DMA’s argument.
Despite this setback, DMA continues to fight the constitutionality of this law. DMA is preparing a petition for an en banc rehearing. If granted, the suit would be considered by all of the judges on the Tenth Circuit, as opposed to only the three that heard the first appeal.
Business Activity Taxes
Ohio and Michigan have business activity taxes (Ohio calls it a Corporate Activity Tax (CAT)) that they assess against both in-state and out-of-state companies. Both claim that the physical presence requirement of the Quill decision applies only to collection of sales taxes. They claim that any out-of-state company that receives an economic gain from doing business with an Ohio or Michigan resident has economic nexus within the state and is subject to this tax. The economic nexus theory has not been tested in any court. Ohio is being more aggressive assessing this tax, and DMA urges all its members that receive a tax assessment from Ohio to appeal the assessment in order to preserve appeal rights in the courts. No company has taken Ohio to court because no company has completed the appeal process within the Ohio tax department, which is required before any appeal to the courts. DMA will assess any further action after the internal Ohio appeal process is completed by a marketer and a court appeal is in order.
Internet Access Taxes
Localities have sought to tax Internet access as they do other telecommunications services. DMA has successfully lobbied Congress to prevent that tax. DMA believes that such a tax would discourage use of the Internet and would, thus, impede e-commerce.
Affiliate Nexus Taxes
A New York law defines nexus for the purposes of requiring the collection of sales tax. New York states that if a marketer compensated an affiliate located in New York for linking to the marketer’s website from the affiliate’s website, that marketer then had physical nexus in New York and was required to collect sales taxes for all its sales in New York. Amazon and Overstock have sued New York and have lost in both the trial and appellate courts in New York. They are now petitioning the US Supreme Court for review. Arkansas, California, Connecticut, Illinois, North Carolina, Rhode Island and Vermont have all passed similar legislation. However, most large marketers using this form of marketing canceled all affiliate relationships within those states. Officials from both North Carolina and Rhode Island have publicly stated that neither state has seen any increase in tax collections, and their residents have lost business due to the cancelation of all affiliate agreements. DMA, along with the Internet Alliance, opposes affiliate tax legislation when proposed in any state.