Sales tax fairness – isn’t there an app for that?

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It’s been a big week for sales tax fairness.

First, the Senate voted 75-24 last Friday night to attach language to the federal budget resolution that would let states require online sellers to collect sales tax the same as local brick-and-mortar stores. The budget resolution itself is just a guideline for Congress, not actual law, so a “real” vote will still have to be taken before sales tax fairness can be enacted. But the move was nonetheless the first time the topic has come to the floor of either chamber of Congress since the House approved a non-binding “sense of Congress” measure in 2001. And it was a huge symbolic victory, sending a strong message that Congress is finally ready to deal with this issue after more than a decade of debate that’s moved slower than a dial-up modem on a party line.

Then on Tuesday, the New York Times ran an editorial endorsing the Marketplace Fairness Act, the legislation that would actually give states the authority to require collection. The Times said online sellers who don’t have to collect sales tax hold an “unfair advantage” over local stores, and called for Congress to “level the playing field” because “fairness demands nothing less.”

While the news of these developments was being e-mailed, Tweeted, Facebooked and, for all I know, Instagrammed, the fight over taxation of online sales comes from a decidedly offline court case.

As those who have read the dozens of press releases NRF has cranked out over the years will recall (a guy can dream, right?), the lack of sales tax collection goes back to the 1992 U.S. Supreme Court decision in a case called Quill v. North Dakota. The court decided that a state cannot require an out-of-state seller to collect sales tax on purchases made by its residents unless the seller has a physical presence in the state, such as a store, warehouse or office. With sales tax laws across the country a mass of conflicts over rates, taxable items and definitions (is a belt a taxable “fashion accessory” or a tax-free article of “clothing”?), the court reasoned that a seller couldn’t know what to collect unless they had boots on the ground.

Quill is the landmark case that lets Internet sellers off the hook for collecting sales tax on most of their sales. But to the surprise of many, it had nothing to do with the Internet.

How many of you were on the Internet in 1992? I wasn’t. Competing services like CompuServe, AOL and Prodigy offered early versions of email and primitive web-like pages on various subjects, but weren’t linked together. The World Wide Web had yet to become worldwide, and e-commerce was unheard of.

Quill was an office supply company based in Illinois but with mail-order customers in North Dakota, and North Dakota wanted Quill to collect sales tax on purchases made by its residents. But Quill didn’t have any employees, stores, offices, warehouse or other physical presence in North Dakota. Quill reached its North Dakota customers the old-fashioned way – printed paper catalogs, flyers, advertisements in national publications and telephone calls. Merchandise was delivered by postal mail or carriers like UPS.

There was, however, one tie to the Internet of the future that played a role in the case. Quill had started mailing its customers floppy disks loaded with software that would let them use a computer, modem and telephone line to make a dial-up connection to an electronic bulletin board that gave them access to Quill’s computer system to check on inventory. (Don’t recognize any of these long-obsolete computer terms? Click on the links.)

Unlike the catalogs that were simply given to customers, Quill made a big deal about how the software was only licensed and remained its property that had to be returned on demand. Because of that, North Dakota’s attorneys argued that the floppy disks constituted “property situated in North Dakota.” The Supreme Court didn’t buy that argument, I wouldn’t, and you probably don’t, either. North Dakota lost, and Quill was free to continue selling there without collecting sales tax.

The Quill case didn’t draw much attention until e-commerce began to take off and untaxed sales on the Internet became a threat to local stores and started to deny state treasuries badly needed tax revenue. The initial reaction by states was to simplify their sales tax systems in order to address the court’s concern that sales tax laws were too complicated. The Marketplace Fairness Act would still require simplification, but backers have argued that software that can track the complexities and automatically apply the proper tax has made the concern irrelevant.

From floppies to the Internet to smartphones, the world has changed a lot since 1992. As NRF chief lobbyist David French said of sales tax collection only a couple of years ago, “Isn’t there an app for that?”

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