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Marketplace Fairness Act of 2013: Where Is The Income Tax Safe Harbor?


Legislation passed by the U.S. Senate on May 6, 2013 would impose sales tax collection obligations on retailers with no physical presence in a state but would not provide a needed income tax safe harbor. 

In what may prove to be one of its most bi-partisan moments in recent years, the U.S. Senate passed S. 743 (The Marketplace Fairness Act of 2013) by a large margin: 69 – 27. The Bill would require remote sellers with more than $1 million in total sales to collect sales taxes in states that adopt sales tax simplification measures. These simplification measures require one-stop tax compliance, one-stop auditing, standardization of what is subject to tax, and 90-day notice of rate changes. 

Logic tells us that virtually every state will adopt these sales tax simplification measures, at least for remote sellers. This is a development that over time may lead to sales tax simplification for all sellers.    

While Main Street sellers with an in-state physical presence have waited for over two decades for Congress to act (since the U.S. Supreme Court effectively provided a sales tax holiday to remote sellers1), remote businesses have waited over five decades since Congress last created a state income tax safe harbor.2 This income tax safe harbor, created in 1959, only applies to the sale of tangible personal property. During these decades not only have remote sellers grown to account for a large share of all sales but revenue from sales of intangible property has also become a significant share of the gross domestic product. 

Much of corporate America has implied over the years that it would accept sales tax collection obligations on remote sellers if a state income tax safe harbor was created for the sale of intangible property as a quid pro quo. However, unless the U.S. House of Representatives demands an income tax safe harbor for sales of intangible property, remote sellers and state revenue departments alike will be left with years of litigation while the contours of the states’ ability to subject the income of remote sellers to taxes works its way through the courts. 

Please click here for the full text of The Marketplace Fairness Act of 2013 [PDF].

1 See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

2 See Interstate Income Act of 1959, 15 U.S.C. §§ 381- 384, commonly referred to as P.L. 86-272.

IRS Circular 230 Disclosure: To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing, or recommending any partnership or other entity, investment plan, or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. To the extent that a state taxing authority has adopted rules similar to the relevant provisions of Circular 230, use of any state tax advice contained herein is similarly limited.

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