The Marketplace Fairness Act and the Ecommerce ImpactMay 29, 2013
Online retailers and customers alike have been wringing their hands about the potential passing of the Marketplace Fairness Act. While it’s true that this bill would bring nationwide changes in the ecommerce industry, many of the concerns on both sides seem to stem from misinformation about the bill. [more]
In summary, the Marketplace Fairness Act will allow state governments to require online retailers to collect a state sales tax (regardless of the retailer’s physical location). In theory, this bill would even the playing field for brick-and-mortar retailers, which are already required to collect sales tax on behalf of the states in which they operate. Consumers are worried that the Marketplace Fairness Tax translates into an all new tax they must pay. Ecommerce businesses are concerned about the logistics of tracking sales-tax data across 50 states.
But there are two pieces of information that those worries do not take into account. Consumers probably don’t realize that many states (45 in total) already require online purchases to be reported and the appropriate sales tax paid. In other words, if you filed your taxes this year and did not include a record of all of your online purchases along with a payment to cover the sales taxes for those purchases, you could face penalties if state tax officials ever decide to enforce the law. Even though this rarely happens, many Americans are still at risk and unknowingly violating tax laws. By placing the onus on ecommerce retailers, the risk is removed.
Conversely, online retailers are worried about the impact such a responsibility will have on their businesses – and rightly so. But, the bill does try to help online retailers with a provision: states are only granted the authority to invoke the Marketplace Fairness Act after they have simplified their sales tax laws. In other words, online retailers would only be required to collect sales tax after the respective states have made it easy to do so. According to the bill, a state can do this by either adopting the measures of the Streamlined Sales and Use Tax Agreement, or by meeting the following simplification mandates:
- Notify retailers in advance of any rate changes within the state.
- Designate a single state organization to handle sales tax registrations, filings, and audits.
- Establish a uniform sales tax base for use throughout the state.
- Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there).
- Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.
In light of these elements, the Marketplace Fairness Act has the power to be an unobtrusive and helpful piece of legislation for ecommerce retailers.