What the Marketplace Fairness Act Means to Small Businesses

 

Before heading out for summer recess, the U.S. Senate made plans to extend the Internet Tax Freedom Act, which bars states from levying taxes on internet access. The act is set to expire November 1, 2014, but with strong bipartisan support it will likely be extended, with an ultimate goal of making this a permanent bill.

Some senators moved to combine that extension with passage of the Marketplace Fairness Act (MFA), the online sales tax legislation that was passed by the Senate last year and has since been pending in the House Judiciary Committee. Industry experts expect the MFA to become law eventually in some form, either as part of the Internet Tax Freedom Act extension or by some other means.

Online Sales Tax Pros and Cons

Some small to mid-sized business leaders wonder what eliminating sales tax disparity would mean for independent retailers and online merchants. For years after ecommerce exploded on the scene, online merchants have operated in a gray area, which the MFA will eliminate by requiring all merchants to collect sales tax for the state in which the purchaser resides.

MFA proponents point out that in a society with a tax-based revenue model, it’s only fair that online merchants have to comply with the same laws that brick-and-mortar stores are expected to follow. Groups that oppose the MFA say that with more than 10,000 separate tax jurisdictions, mom-and-pop ecommerce companies would be at a significant disadvantage if they had to collect sales tax on items sold online.

In the early days of the internet, that argument had more resonance than it does today. Ecommerce operators are a relatively tech-savvy group – they have to be to create an online presence and manage complex transactions. And there are software solutions on the market to handle the tax collection and remittance process. To claim that smaller companies are incapable of tax compliance is to make a 20th century argument in a 21st century world.

How Small to Mid-Sized Businesses Can Prepare  

So what will passage of the MFA mean for small businesses and ecommerce operations? Brick-and-mortar stores will see little impact since they are already required to collect sales tax on in-store purchases where applicable.

For ecommerce stores, the impact will depend on the final form of the legislation. It will likely be phased in over time, and there may be annual revenue thresholds that apply. Businesses that want to prepare should begin looking at affordable software solutions available now to handle sales tax compliance. Here are some tips on choosing the right one:

  • Find a fully automated solution that handles all facets of the online sales collection and tax remittance process. Make sure it can file returns and not just calculate taxes. Don’t be lulled into thinking you’re in compliance just because you’re calculating taxes. The second part of tax compliance – filing the return – is probably also the most important one. The first focus of the state is the return that was filed and tax payment remitted, not what you calculated in your shopping cart.
  • Look for a solution that integrates with existing shopping cart and accounting software to streamline transactions and record-keeping. Don’t settle for a solution that requires you to go through manual monthly updates, or that calculates taxes inaccurately because it does not differentiate between different tax rates that apply to different products.
  • Make sure the solution is certified by the states’ departments of revenue, so you know that state auditors feel comfortable you’re using accurate rates and rules, and you aren’t just relying on the word of the salesperson.
  • Ensure that the solution can calculate and file returns in all states. If it handles returns in some but not all state and local tax authorities, you’ll have to file on your own in all the others. Generating and filing a tax return requires subject matter knowledge and expertise that should come from the solution provider.
  • Ensure that the solution maintains an audit trail and can address state questions and issues. If you have to spend hours each month communicating with the state to answer their questions about your filing, the tax solution hasn’t really helped you save time.

The Bottom Line on the MFA

Ready or not, the MFA will almost certainly become the law of the land, and likely sooner rather than later. The impact on brick-and-mortar stores without significant ecommerce operations will be minimal; they’ll have to comply with state tax collection just like they always have.

But small to mid-sized ecommerce operations should get ready in advance to minimize the impact on their operations. The key to that will be to find a tax compliance company that will act as a partner, not just a service. With a comprehensive solution in place, small to mid-sized ecommerce companies can continue to thrive and grow while fully complying with sales tax collection, remittance and filing obligations.

 

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