In May, the Senate passed the Marketplace Fairness Act with a vote of 69-27 and clear bipartisan support. The bill is still under review by the House Judiciary Committee where more detailed research into the impact of the bill on online retailers is expected. With a Republican-controlled House that includes many anti-tax representatives, passage will be more difficult.
The measure would require that retailers with online revenues over $1 million annually collect state tax on remote (online, catalog, phone, etc.) sales regardless of their location. Currently, if an online retailer sells a product in a state where it does not have a physical nexus, they are not required to collect tax, but the buyer is expected to claim the tax on their annual tax return – a rule that almost no one follows.
Organizations that oppose the measure and those who support it have been extremely vocal about their opinions on the subject. Two of the leaders in the industry, eBay and Amazon, fall on opposite sides of the argument.
The Supporters’ Position
Supporters argue that online retailers have enjoyed a 5% to 10% price advantage for years by not collecting taxes and the MFA simply levels the playing field by closing that price gap.
Listed on the MFA webpage of business supporters, online retail giant, Amazon, stated that it has long supported simplified tax rules that are applied “evenhandedly” to all but the very smallest retailers. The simplified tax rules Amazon refers to are part of the Streamlined Sales and Use Tax Agreement, or SSUTA.
Under the MFA, states that want to receive tax revenues must standardize and simplify their tax codes according to this agreement. States that want to collect taxes but choose not to comply with SSUTA still have to meet five simplification mandates outlined in the bill. In both scenarios, free software is available to retailers.
Some may be surprised that Amazon would support a bill that increases its own taxes, but in reality they are already paying taxes in many states due to affiliates and fulfillment centers scattered across the country – and they are adding more of these each year. So although not collecting sales tax was once a competitive advantage over brick-and-mortar stores, it has slowly diminished. Passage of this bill will simply place the same tax collection burden that Amazon already deals with on its online competition.
The White House has also expressed its “strong support” for the bill with the statement it released on April 22, 2013. The Administration expects that the bill will level the playing field between small brick-and-mortar retailers and large online retailers. It also believes that the additional revenue will allow cities and states to invest more heavily in education and other services such as police and fire protection, roads and bridges, and health care.
The Opposition’s Stance
The opposition’s outlook is not quite as optimistic. They argue that it is unfair to make a company that has no presence in a state to collect taxes on its behalf, especially when that retailer does not benefit from the services that state provides.
Other opponents believe that beyond how “fair” the bill is, the MFA in its current version places undue burden and cost on retailers and fear that it will cripple small businesses. eBay, in particular, has lobbied extensively to bring “greater balance to the legislation” by raising the revenue threshold to $10M in sales or fewer than 50 employees. Without change, opponents are concerned that small retailers will stunt their own growth to remain under the $1M threshold, which not only affects that business’ individual success but the entire economy.
The eMainStreet Alliance, a grassroots group of more than 300 online retailers, has quantified the potential impact on small retailers. Even with the free software, the Alliance estimates the cost of compliance for up to 9,600 tax venues will range from $20,000 to $300,000 depending on the number of states and complexity of the industry. In many cases, this would exceed many business’ annual profits.
eMainStreet also warns that audits could not only put small retailers out of business but could personally harm business owners. The MFA includes a safeguard that limits audits to not more than one per state per year. But even with that limitation, small businesses would still be subject to audits from up to 46 states where they have no physical presence, political representation or right to vote. Furthermore, most states can hold a company’s “responsible person(s)” personally liable for unpaid sales tax liabilities, which puts the personal property of the small business owner at risk.
The Debate in the House
With the fate of the bill in the hands of the House, the debate is heated. Anti-tax legislators view the bill as a new tax, while their less conservative counterparts say it’s already been in place for years but just hasn’t been collected. There is also a divide within the Republican Party itself with younger Republicans opposing the bill and older ones (including the bill’s sponsor, 69-year old Wyoming Republican Mike Enzi) supporting it. In fact, every Republican under 50 in the Senate voted against the bill.
A Message to Merchants
Merchants should keep a close eye on the debate and actively explore options for compliance should the measure pass. There are many tax solution providers that are providing free education on the subject as well as integration software to ease the transition should it be necessary. But the key is preparation. Have a plan and, if the time comes, be ready to execute.
For a full list of registered opponents and supporters, details of the bill, and news coverage, please visit www.marketplacefairnessact.org.