Earlier in the year Congress promised to tackle tax reform in the spring, and that resulted in the reintroduction of two internet sales tax bills: the Marketplace Fairness Act (MFA) and the Remote Transaction Parity Act (RTPA).
We’ve written extensively about both of these bills in the past. In short, both of these are bills with bipartisan support, but very tilted toward the welfare of states and brick and mortar stores with no online presence. Unfortunately, and probably unknowingly, both bills will place a hugely unfair burden on online sellers if passed.
Recap of the Marketplace Fairness Act
If this act passes, online sellers who make more than $1 million in remote (non-home state) sales per year would be required to collect sales tax not only in the states where they already have sales tax nexus, but in any states where they don’t have a nexus at all. The $1mm is remote “sales,” and not profit.
As it currently stands, the precedent set in the Quill v. North Dakota case of 1992 protects retailers from being required to collect sales tax in states where they do not have a significant presence. This law would strip that protection away and require sellers to collect sales tax in states not only where they have nexus, but also where they have sales.
Example of how the Marketplace Fairness Act would affect an Amazon FBA seller:
Jean owns a home goods company selling through Amazon FBA and makes about $3 million in sales per year. She has nexus in her home state of Michigan and ten other states due to storing inventory in Amazon fulfillment centers. Because she wants to avoid future tax surprises and plans to sell her business some day, she’s currently collecting sales tax in all of her nexus states. If the Marketplace Fairness Act passed, she’d also be required to collect sales tax from buyers when she makes sales in the states where she has no nexus. This would add more administrative hassle, because she would also have to report how much sales tax she collected from buyers in all these states, and file sales tax up to 12 times per year in each of these states. Also, because the bill is a hodgepodge, she’d need to follow one set of rules for her nexus states and another set of rules for the states where she has no nexus.
Other aspects of the Marketplace Fairness Act:
- States can only require out-of-state sellers to file sales tax with one state taxing authority, rather than multiple local authorities (like the way Alabama, Colorado and a handful of other states require right now)
- Sellers can only be audited by a single state taxing authority within each state
- Remote sellers wouldn’t be required to file sales tax any more frequently that in state sellers. (I.e. a remote state can’t require you to file monthly when every in-state seller in your revenue bracket files quarterly)
Summary: The Marketplace Fairness Act is not fair to online sellers, the very sector that is growing the retail economy. While no one thinks that states should not have the sales tax they use to fund schools, roads and fire departments, there has to be a better way than subjecting small business owners to a Frankenstein of sales tax laws and making sales tax collection, reporting and filing even more complex.
You can read more about the Marketplace Fairness Act here:
- Text of the Marketplace Fairness Act of 2017 bill
- Marketplace Fairness Act of 2015: Congress Still Clueless About Small Business
- Software is Not the Way to Solve the Internet Sales Tax
Recap of the Remote Transaction Parity Act
Similar to the Marketplace Fairness Act, the Remote Transaction Parity Act would not affect existing nexus, but would require retailers to collect sales tax in remote states, as well as in states where they have nexus.
The RTPA works on a tiered system, with online sellers making $10 million in sales or more subjected to the law in the first year, online sellers making $5 million in sales or more subjected to the law in the second year, and online sellers making more than $1 million in sales subjected to the law in the first year. EXCEPT online sellers who utilize “an electronic marketplace for the purpose of making products or services available for sale to the public.” These sellers – a grandmother who sells on eBay after retirement or a college student dipping her toe in the water to sell on Etsy – would be required to collect sales tax in every state, no matter if they make $10mm in sales in a year or $10,000. Sellers on online marketplaces – which are right now the training ground for online sellers getting their eCommerce start – would be subject to the administrative burden of collecting sales tax from buyers in every state where they make a sale.
Summary: More than any other bill, the RTPA demonstrates an ignorance of how the eCommerce economy truly works. Subjecting all online marketplace sellers to the demands of sales tax in all U.S. states will hurt the small business that the bill purports to help. Not all small mom & pop businesses are on Main St. anymore – a lot of them are now in mom & pop’s garage using their Amazon account.
You can read more about the Remote Transaction Parity Act here:
- Text of the Remote Transaction Parity Act of 2017
- New Internet Sales Tax Grab Decimates Online Sellers
Summary
TaxJar is a sales tax software, and we would most likely benefit from the increased complexity online sellers would face due to the passage of the Marketplace Fairness Act or the Remote Transaction Parity Act. But, here at TaxJar, we strongly oppose both bills. They would be detrimental to the online sellers that we serve. In the long term, nobody benefits when the small business owners who drive this economy are buried under mountains of sales tax law.
As I’ve said ad nauseam in the past, these two bills betray a basic lack of understanding of how eCommerce today works. Congress thinks these bills are striking at behemoths like Amazon, when they are really striking at small one or two person businesses. Clauses like the $1 million cap in the Marketplace Fairness Act may seem to an out-of-touch Congress like safeguards, but as any online sellers knows, this business has slim margins and a business with $1 million dollars in sales can be barely profitable.
The fact that Congress thinks that some hazy notion of “software” will fix this problem for online sellers betrays another basic misunderstanding when it comes to how our state sales tax systems works. There is no magic button you can push to make sales tax compliance easy. Believe me.
Unfortunately, the one bill that was somewhat fair to all retailers as well as states who want to make sure they collect their share of sales tax – the Sales Tax Simplification Act of 2016 – is nowhere to be found in the 115th Congress.
We urge you to ask your representatives to vote against both of these bills. In the meantime, we’ll keep updating the blog with new info as the battle against unfair online sales tax continues.
Do you have questions or something to say about internet sale tax? Start the conversation in the comments.
