It has been widely reported that supporters of legislation that would enable states to collect sales and use taxes on purchases made from out-of-state sellers by in-state customers (generally via the internet) plan to push the legislation in the “lame duck” session of Congress. As previously reported, under current law, states generally cannot collect such taxes from an out-of-state retailer without a physical presence in the state (a “remote seller”) because such collections—absent congressional authorization—would violate the Interstate Commerce Clause of the U.S. Constitution. Congress can, however, authorize the collection of such taxes by states, and is considering bills which would do so. The proposed legislation would have implications for sales made to purchasers in Indian Country and by sellers in Indian Country.
On May 6, 2013, S 743, The Marketplace Fairness Act, passed the Senate and was sent to the House, where there has been no further action. The bill would authorize a state to impose tax collection responsibilities on out-of-state retailers if the state met one of two conditions. A state would have to either (1) sign on to the Streamlined Sales and Use Tax Agreement (SSUTA), a multi-state agreement that requires states to adopt a simplified sales tax system so that both internet and brick-and-mortar retailers may easily collect and remit sales taxes or (2) meet certain procedural requirements relating to: the sales and use tax rate structure; streamlined return filing; and uniform tax base as well as uniform exemptions throughout the state. The bill includes exceptions for sellers whose gross annual receipts on remote sales in the United States are $1 million or less.
As originally introduced, S 743 (and other similar pending bills) did not address sales in Indian Country specifically, or any existing tax agreements between tribes and states. The bills as introduced did not expressly prohibit states from taxing sales to tribal members, nor did they authorize tribes to collect tribal taxes that some tribes levy on sales within their lands. Under current law, sales to tribal members within Indian Country are exempt from state taxation. Also, tribes generally have the right to tax sales to non-tribal members on their lands. Tribal organizations objected to the bills as drafted, arguing that any such legislation must satisfy three principles: (1) it cannot authorize state taxation of Indians in Indian Country, (2) it must allow tribes to tax sales within Indian Country, and (3) it must prohibit double-taxation in Indian Country (i.e., collection of a state tax in addition to a tribal tax).
The Senate amended S 743 prior to passage to address these tribal concerns. Specifically, the definition of “state” was amended to include “any tribal organization (as defined in section 4 of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 450b)).” The language appears to be somewhat ambiguous, in that it defines “tribal organizations”—rather than tribes—as states with taxing powers, and in that it does not specifically address all of the tribal concerns. The language was clearly intended, however, to permit tribes to tax internet sales, as made clear in a floor statement by Senator Heitkamp (D-ND). Senator Heitkamp further stated: “It is important to note that this bill does not authorize States to collect a tax on sales to tribal members in Indian country. Under the bill’s sourcing rules, read in conjunction with the definition of ‘State,’ a sale within a tribe’s jurisdiction would be subject only to the tribal tax, and not to a non-tribal State or local tax.”
The text of S 743 has been incorporated into another bill, S 2609, which combines the internet sales taxation issue with a permanent extension of the federal prohibition on the taxation of internet service. The internet service tax moratorium is set to expire in mid-December.
Please let us know if we may provide additional information regarding the legislation summarized in this Memorandum.