What Happened to the Marketplace Fairness Act?

The Marketplace Fairness Act was a proposed piece of federal legislation designed to empower states to require out-of-state businesses to collect and remit sales taxes. Its primary objective was to address the disparity between online retailers and traditional brick-and-mortar stores, which are obligated to collect sales tax at the point of sale. The act aimed to grant states the authority to enforce their existing sales tax laws on remote sellers, thereby leveling the competitive landscape.

The Physical Presence Rule

For decades, the obligation for a business to collect a state’s sales tax was determined by the “physical presence” rule. This standard was solidified by two major Supreme Court decisions, National Bellas Hess, Inc. v. Department of Revenue (1967) and Quill Corp. v. North Dakota (1992). These rulings established that a state could only compel a business to collect its sales tax if the business maintained a substantial physical footprint within that state’s borders.

A physical presence was defined by tangible connections, such as having an office, a warehouse, employees, or a sales team located in the state. The existence of customers alone was not sufficient to create the necessary connection, or “nexus,” for a state to impose a tax collection duty. This created a legal shield for businesses engaged in mail-order and, later, e-commerce sales.

As internet and catalog sales grew, this rule gave remote sellers a significant advantage. They could offer goods without collecting the sales tax that local businesses were required to, resulting in lost revenue for states and placing local businesses at a competitive disadvantage.

Key Provisions of the Proposed Act

The Marketplace Fairness Act (MFA) was crafted to address the limitations of the physical presence standard. To gain the authority to collect taxes from remote sellers, states would have been required to simplify their tax systems.

A primary feature of the proposed act was a small-seller exemption. Most versions of the bill exempted businesses with less than $1 million in annual nationwide remote sales. This threshold was intended to protect small businesses from complex compliance burdens.

To ease the administrative load on businesses, the MFA required participating states to simplify their sales tax processes. States could either join the multi-state Streamlined Sales and Use Tax Agreement (SSUTA) or independently adopt a series of minimum simplification mandates. These mandates included providing a single, state-level agency for registration and tax remittance, establishing a uniform tax base across the state, and offering free software for calculating taxes and filing returns.

The Shift to Economic Nexus

The legislative momentum behind the Marketplace Fairness Act was rendered moot by a 2018 Supreme Court decision. In South Dakota v. Wayfair, Inc., the Court re-examined the physical presence rule upheld in Quill. The case was initiated by South Dakota, which passed a law directly challenging the existing standard by requiring remote sellers to collect sales tax if they met certain economic thresholds.

The Supreme Court overturned Quill Corp. v. North Dakota, declaring the physical presence rule “unsound and incorrect” in the age of e-commerce. The majority opinion noted the rule was an “arbitrary, formalistic distinction” that distorted the market and was no longer relevant. The Court concluded that physical presence was not a required interpretation of the U.S. Constitution’s Commerce Clause.

The Court established the concept of “economic nexus” to replace the physical presence rule. This standard allows a state to require a business to collect sales tax based on its economic activity within that state, even without a physical location there. The Wayfair decision granted states the authority the Marketplace Fairness Act had sought, but through judicial precedent instead of legislation.

Current Online Sales Tax Obligations

Following the Wayfair decision, businesses must navigate a landscape governed by state-specific economic nexus laws. These laws establish thresholds that create a sales tax collection obligation for a remote seller. While the specifics vary, a common threshold adopted by many states is $100,000 in gross sales or 200 separate transactions into the state within a calendar year. It is important to note these are not uniform, as some states set different sales amounts or have no transaction count threshold.

Compliance for a remote seller begins with tracking sales revenue and transaction volume in every state. When a business crosses a state’s economic nexus threshold, it must register for a sales tax permit with that state’s revenue agency, which can often be done online.

Once registered, a business must calculate, collect, and remit the correct sales tax on all taxable sales into that state. This process can be complex due to varying state and local rates and rules. Many businesses use automated sales tax software integrated with their e-commerce platforms to manage these obligations.