State Tax Snapshot: Does the Marketplace Fairness Act Satisfy Due Process Requirements?

T he U.S. Senate’s passage of the Marketplace Fairness Act in May was an important milestone toward the enactment of legislation granting states the authority to collect sales or use taxes from remote retailers. But the legislation’s prospects remain uncertain from a substantive and political standpoint.

Substantively, the legislation is grounded upon the authority of Congress under the U.S. Commerce Clause to enact legislation on matters affecting interstate commerce. But it is unclear if the Marketplace Fairness Act would withstand scrutiny under the Due Process Clause.

This is particularly the case after the U.S. Supreme Court in 2011 issued two Due Process rulings ( J. McIntyre Mach. LTD v. Nicastro , 131 S. Ct. 2780 (2011) and Goodyear Dunlop Tires Operations S.A. v. Brown , 131 S. Ct. 2846 (2011)) in which the Court underscored the requirement that a company must have purposefully directed activity within a state before it could be subject to the state court’s jurisdiction. 

Unlike the U.S. Commerce Clause, “Congress cannot legislate Due Process,” explained Professor Richard Pomp at a recent Bloomberg BNA State Tax Advisory Board Roundtable. Congress can “expand Due Process rights. But it can't take away Due Process rights that you have,” Pomp said.

As a result, Pomp added, if the Marketplace Fairness Act becomes law, “I think we're going to be right back asking the question: If I have a website that you access and the business doesn't do anything affirmative in the state as in McIntyre, can the business be made to collect the use tax on sales into your state?”

But not everyone thinks that Due Process issue is important. “[T]his discussion regarding due processclause issues associated with the Marketplace Fairness Act, I believe, is a red herring,” said Jeffrey Friedman, with Sutherland Asbill & Brennan LLP at the Roundtable.  “No federal law could be viewed as perfect and clearly this one isn’t perfect,” he added.  

Other federal legislation on state taxation has survived despite inviting potential Due Process challenges, Friedman said. For example, he noted that in the Mobile Telecom Sourcing Act of 2000, “which has a primary place of use concept--there are numerous Due Process Clause issues associated with sourcing telephone calls to a person’s residence that have nothing to do with that person’s residence.”

The transcript of the discussion of the Marketplace Fairness Act and several other important state tax issues is included in the State Tax Advisory Roundtable special report which is available to subscribers of the Bloomberg BNA’s Premier State Tax Library.    

By Steven Roll

Follow us on Twitter at:  @BBNATax
Join BNA's State Tax Group on LinkedIn here.