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U.S. Senators Propose Internet Sales Tax Law

On Wednesday, four U.S. Senators proposed a law, dubbed The Marketplace Fairness Act, that as advertised would allow states to collect taxes on sales over the Internet even if the buyer does not live in the state in question. There's just one catch: In order to do so, states would need to have signed on to one of two 'simplified' tax plans.

The law's stated intent is to create a more competitive marketplace by allowing states to charge sales taxes on online transactions the same as for brick and mortar businesses. Currently, sales taxes on online transactions are mostly prohibited - it's a really large gray zone* - due to a 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, which held that mail-order retailers are not required to collect use taxes due to the complexity of doing so. (Because of the way the U.S. Constitution delegates powers to individual states, there is no standard of sales tax collection. Businesses would have to drastically reconfigure their state-by-state sales records depending on a given customer's state's tax laws in order to comply).

One proposed solution, referenced in The Marketplace Fairness Act, is the Streamlined Sales and Use Tax Agreement. That agreement, proposed since 1999, similar to the National Popular Vote movement, aims to overcome certain systemic weaknesses in interstate commerce by encouraging states to voluntarily agree to make their tax systems compatible in order to simplify the collection of taxes from online and mail-order businesses and therefore collect sales taxes without running afoul of Quill. So far, 44 U.S. states have signed up, however as the agreement is non binding, it is still up to congress to approve legislation authorizing states to collect such taxes, hence The Marketplace Fairness Act. Prospects for the law are not good, however, as all prior attempts to pass such laws have failed.

*Amended to clarify the framework caused by Quill Corp. v. North Dakota