Annette Nellen

Repeal of Quill Hinges on Defining Equity

Escalating attention on collecting sales tax on Internet sales may fall apart without agreement on "small" business and the meaning of equity.

December 19, 2011
by Annette Nellen, CPA, Esq.

In 2011, attention escalated on the issue of uncollected sales and use tax on Internet sales. Apparent reasons:

  • Continued growth in e-commerce causing increased amounts of uncollected tax;
  • State budget deficiencies; and
  • More states enacting "nexus grabbing" legislation to find ways to get vendors to collect the tax.

What also escalated in 2011 is attention by Congress on resolving the issue, which the U.S. Supreme Court reminded us all in 1992 with issuance of the Quill decision (504 US 298), that Congress has the power to address. Per the Court:

"the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions." (Congress' power stems from the commerce clause of the U.S. Constitution.)

Three bills were introduced in 2011 with varying approaches for enabling states to collect sales tax from vendors who lack a physical presence in the state (such bills, in effect, reverse the Quill decision, but within specified parameters a state must meet).

One significant point that Congress will need to resolve in crafting a single proposal is whether any e-commerce vendors should be exempt from sales tax collection in states where they have no physical presence and if so, how the threshold is defined. This article provides a summary of the current sales tax proposals and the arguments for and against having a de minimis rule that exempts small e-commerce vendors.

Main Street Fairness Proposals

The first bill proposing a system where states would be allowed to collect sales tax from non-present (remote) vendors was S. 1825 (103rd Congress) introduced by U.S. Sen. Dale Bumpers in 1994. It included a de minimis exception, and most proposals since have done the same. S. 1825 proposed to exempt vendors with $3 million or less sales of tangible personal property in the U.S. or $100,000 or less of such sales in a particular state. Since that time, as evidenced by the current debate, the range for defining de minimus (including having no de minimus rule) has varied. S. 2152 (109th Congress) used a similar threshold but with $5 million of U.S. sales as the threshold.

The three legislative proposals of the 112th Congress:

The Main Street Fairness Act: H.R. 2701 and S. 1452 (112th Congress) proposes that to the extent the Streamlined Sales and Use Tax Agreement (SSUTA) meets specified simplification standards, adopting states may collect sales tax from remote sellers. The SSUTA would need to include a "uniform rule to establish a small seller exception."

The Marketplace Equity Act of 2011: H.R. 3179 (112th Congress) lists features a sales tax system must have to be considered simplified, while not mandating (or even referring to) the SSUTA. It also includes three possible rate structures including one rate per state. The bill calls for a small seller exception for "remote sellers with gross annual receipts in the preceding calendar year from remote sales of items, services, and other products in the United States not exceeding $1 million (or such greater amount as determined by the State involved) or in the State not exceeding $100,000 (or such greater amount as determined by the State)."

The Marketplace Fairness Act: S. 1832 (112th Congress) allows both states that have adopted the SSUTA and those that have not, but who modify their sales tax to meet the simplifications specified in S. 1832, to collect from remote vendors. Small sellers, defined as having gross annual receipts for remote sales in the U.S. in the prior year in excess of $500,000, would be exempt.

Whether and Where to Draw a Line for Small

As evidenced by the proposals introduced in 2011 and prior, small seller exemptions cover a range of possibilities. The topic of a small seller exemption as part of congressional authorization for states to collect sales tax from remote vendors was highlighted at a House Judiciary Committee hearing (Constitutional Limitations on States' Authority to Collect Sales Taxes in
on November 30, 2011).

Suggestions at this hearing ranged from having no exemption to exempting businesses with sales up to $30 million. The arguments for these positions are summarized next.
Exemption: Many laws and proposals include exemptions for small businesses. Typical reasons include reducing compliance burden, helping small businesses grow and recognizing that the tax dollars involved may be minimal. Written testimony (PDF) of eBay, presented at the November 2011 hearing noted: "Protecting small businesses from burdens that will undermine their growth and even directly promoting small business operations is not a new or novel concept."

Tod Cohen of eBay who testified at the hearing, noted that a collection exemption for small businesses helps such businesses have an opportunity to participate in the global marketplace. He suggests that tax policy can be used to help small e-commerce vendors compete with larger e-commerce vendors in the global market. He notes that the large vendors enjoy advantages of economies of scale. (hearing webcast, approximately 1:22 hours into the video)

A 2008 report (PDF) of a SSUTA Small Seller and Vendor Compensation Task Force noted: A "threshold is presumably intended to insure that those sellers required to collect have the capacity to comply with the obligation as well as insuring that inordinate resources are not expended by either the seller or the states to collect a relatively small amount of tax."

S. Res. 309 and H. Res. 95 (112th Congress) call for not imposing a tax collection burden on small businesses. These resolutions include the suggestion that such obligations "would adversely impact hundreds of thousands of jobs, reduce consumer choice, and impede the growth and development of interstate commerce."

For those who recommend an exemption for small businesses, the issue then becomes how to define "small." At the November 2011 hearing, the representative from eBay suggested use of the Small Business Administration (SBA) definition of small (written testimony and video of hearing available at committee website). eBay's written testimony notes that SBA's definition of small for an e-shopping business is $30 million of annual sales and the lowest sales threshold used for retail is $7 million. The SBA standards were suggested because of the SBA's expertise regarding small business and the small profit margins for these sellers warrants a high sales threshold.

One suggestion made to the SSUTA was for a $100,000 threshold, although the recommending business also noted that an exemption might not be warranted (The Federal Tax Authority, 2010 testimony (PDF)).

Finally, should a small seller exemption be included, Congress will need to determine if the sales threshold should be based on a vendor's total sales or only the remote sales.
No exemption: Arguments for having no exemption such that all remote sellers would potentially be subject to sales and use tax collection on all sales include the following:

  • Any exemption poses a disadvantage to Main Street retailers who collect on all sales.
  • An exemption challenges the touted simplification. That is, if the sales tax system in a state (including collection options) has truly been simplified, why should any vendor have a collection exemption?
  • An exemption will result in a continued problem with uncollected sales tax. In its November 2011 testimony (PDF), Amazon noted: "nearly 30 percent of uncollected sales tax revenue today is attributable to sellers with annual online sales below $150,000, and only one percent of online sellers sell more than this amount. In other words, a $150,000 exception would deny the states nearly 30 percent of the newly available (yet already owed) revenue, but would exempt from collection 99 percent of online sellers. Any higher threshold would deny the states even more revenue and keep the playing field even more un-level."
  • Technology and third party collectors allow for low cost sales tax collection that will not burden small businesses. Large retailers can assist smaller sellers to collect. At the November hearing, Paul Misener of Amazon observed that Amazon can collect tax for vendors who sell on the Amazon website and suggested that eBay could do the same for its sellers. The Amazon website notes that it charges 2.9 percent of tax collected for its collection services. The SSUTA system provides software and administrative services for sales tax collection for registered vendors, at no cost (see FAQs).


The November hearing made it clear that a significant issue for Congress to resolve is how equity and fairness should be considered in order to determine whether any small sellers should be exempt from sales tax collection. Congress will have to determine how the mix of large and small vendors and e-commerce and bricks-and-mortar vendors should be viewed to determine which are similarly situated and which are not. As U.S. Rep. Mike Pence noted at the hearing, inaction by Congress already creates "winners and losers." (webcast, approximately 1:38 hours into the video)

At the hearing, U.S. Rep. Dennis Ross shared a specific example of an equity issue involving a storeowner whose customers sometimes ask if he will discount prices by six percent to address the price difference of the equivalent goods available online where sales tax is not charged. Witness and small business owner Dan Marshall noted that he often reminds customers that the six percent higher price he charges due to sales tax does not go to him, but to the state; yet, customers tend to just be more focused on getting the lower price. (webcast, approximately 2:34 hours into the video)

Equity considerations should also include whether states should be required to provide compensation to vendors for collecting sales tax.

Looking Forward

More factors exist today to indicate that Congress may finally enact a version of what Senator Bumpers introduced in 1994 to allow states to collect sales tax from remote vendors. For example, the company that has garnered perhaps the most attention in the e-commerce sales tax issue, Amazon, has stated that it "strongly supports" S. 1832, The Marketplace Fairness Act. (Amazon press release, November 9, 2011).

In addition, state efforts to get buyers to self assess use tax continues to generate a significant use tax gap. With states in need of funds, Quill-reversing legislation might be enacted as a way for the federal government to help state coffers without using scarce federal dollars. Perhaps Congress will act in time to make "Cyber Monday" 2012 a revenue generator for the states.

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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA and California State Bar. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform. For more information and links on this topic, visit Nellen’s blog.