Statement of Judiciary Committee Chairman Lamar Smith Full Committee Hearing on H.R. 3179, the Marketplace Equity Act of 2011

Statement of Judiciary Committee Chairman Lamar Smith
Full Committee Hearing on
H.R. 3179, the Marketplace Equity Act of 2011

Chairman Smith: Last November, the Judiciary Committee held a hearing to explore whether Congress should enable states to collect sales taxes from retailers who lack a physical presence in the state. 

Today we will consider whether the legislative proposal authored by our colleagues, Congressman Steve Womack of Arkansas and Congresswoman Jackie Speier of California, addresses those concerns. 

Their bill, H.R. 3179, the Marketplace Equity Act of 2011, has bipartisan support from members both on and off this committee.

In the 1992 case Quill v. North Dakota, the Supreme Court held that under the dormant commerce clause, a state may not compel a retailer to collect and remit the state’s sales tax if the retailer lacks a physical presence in the state. 

In the Supreme Court’s view, to force a retailer to collect and remit taxes to more than 9,000 state, county and local taxing jurisdictions throughout the country places a serious burden on the retailer’s ability to sell in interstate commerce.

Quill’s bright-line “physical presence” rule for tax collection makes sense for small businesses that cannot afford to track and comply with 9,000 different tax codes as a cost of doing business throughout the country. 

The Constitution does not allow one state to reach into the pockets of another state’s retailers to exact taxation without representation.

But brick-and-mortar retailers claim that the physical presence rule creates an unlevel playing field between them and their online retailer counterparts. 

Online retailers, who maintain a very limited physical presence and use common carriers to fill orders, enjoy a competitive advantage over traditional retailers.  This is because most states cannot compel the online retailer to collect and remit its sales tax.  Neighborhood brick-and-mortar stores, meanwhile, must collect and remit taxes on all purchases.

Moreover, state and local governments view the taxes they cannot collect on most online sales as lost revenue.  It is true that online consumers owe a use tax to the state in which they reside, but data show that use taxes are easily avoided, rarely paid and difficult to enforce. 

The Court’s decision in Quill was based on the observation that compliance with numerous taxing jurisdictions’ laws would be burdensome and confusing.  The Constitution does not require a physical presence standard as a tax collection criterion. 

Congress may pass legislation that uses a different standard under its power to regulate interstate commerce.
The Marketplace Equity Act replaces the physical presence requirement with a requirement that state and local governments significantly simplify their tax policies if they want to collect sales taxes from out-of-state retailers.  It also contains an exception from the tax collection duty for small sellers. 

Any bill to enable sales tax collection from remote vendors should contain a robust small seller exception. This way America’s job creating small businesses do not become mere tax collection agencies for those 45 states with a sales tax.

While today’s hearing is on the Marketplace Equity Act, at least two other similar bills have been introduced this Congress:  one by Senators Enzi, Durbin and Alexander, called the Marketplace Fairness Act, and one by Ranking Member Conyers, called the Main Street Fairness Act.