Internet Sales Tax

Marketplace Fairness Act of 2015: What if it passes?

by Mark Faggiano

Marketplace Fairness Act of 2015

Last week the “Marketplace Fairness Act” (MFA) reared it’s ugly head again. We at TaxJar have always been very clear that we are against the MFA and anything like it. In short, this version of “internet sales tax” would impede small business growth and bury small business owners under a mountain of compliance.

So what would the world of eCommerce sales tax look like if the Marketplace Fairness Act of 2015 passed?

Sellers Would Be Forced to Collect Sales Tax from More Customers

Right now, sellers must collect sales tax from buyers in state where they have “sales tax nexus.” This precedent was set with the Quill Corp. v. North Dakota Supreme Court case back in 1992.

In a nutshell, this means that sellers only have to collect sales tax from buyers in states where they have a significant presence. For some sellers, this may be only one state – their home state. Others, like Amazon FBA sellers, may have to collect in the 16 (and counting) states where Amazon warehouses are present. Collecting sales tax from buyers in multiple states – all of which have vastly different sales tax rules – is already incredibly burdensome.

But if the Marketplace Fairness Act passes, it will negate the current idea of nexus. Instead, online sellers who make more than $1,000,000 gross in remote sales per year will have to collect sales tax in all states that require a sales tax, no matter if they have any sort of “presence” in that state or not.

That million dollar number may sound large, but keep in mind that that number is “gross” sales.” This doesn’t include the money a small business owner spends sourcing products, shipping, hiring, and keeping up with the administrative tasks of running her business (like complying with insane sales tax burdens.) Profit margins in eCommerce are small, and with increased competition both domestic and abroad, they are only getting smaller. It’s very feasible for a small eCommerce seller to hit the $1,000,000 remote sales mark while still barely scraping by.

Sellers Would Answer to Forty-Five States

The Marketplace Fairness Act would allow the 45 states (plus D.C.) which have a sales tax enacted to require all sellers to collect and remit sales to state taxing authorities.

This means 46 times the sales tax compliance burden, 46 times the paperwork, and 46 times the headache for online sellers just trying to comply with the law.

While the new bill talks about “simplification” of state sales tax, it’s wording doesn’t deliver. “Simplification” includes:

  • a single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state;
  • a single audit of a remote seller for all state and local taxing jurisdictions within that state; and
  • a single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

Most states already abide by these “simplified” guidelines. The problem isn’t dealing with a single sales tax authority or sales tax form in one state, it’s the fact that online sellers have to deal with these “single entities” 46 times! And don’t even get me started on the prospect of being audited by 46 separate central entities. That system isn’t simpler for anyone.

Sellers Would Need to Figure Out Sales Tax in Nearly 10,000 Jurisdictions

If the Marketplace Fairness Act passes, all remote states would become “destination-based” states. This means that sellers would be required to charge sales tax at the “ship to” address of the buyer. There are nearly 10,000 sales tax jurisdictions in the United States, each with different sales tax rates. Shopping carts and online platforms would have to be reconfigured to collect sales tax at these rates. And if that isn’t possible, eCommerce sellers would find themselves consulting each state to try and determine the sales tax rate at their buyer’s destination. Requiring this manual burden hardly allows for seamless commerce, and is a detriment to online sellers that brick and mortar sellers do not have to face.

Sellers Would Face A Supposed “Software Solution”

The new Marketplace Fairness Act proposes that free software be provided to every online seller to help them keep compliant with state sales tax rates.

As a company that makes a sales tax software, we here at TaxJar know how difficult and complicated this prospect is. And, unfortunately, the government doesn’t have the best track record when it comes to implementing complex software. The website need to perform far less intricate tasks than a sales tax software would, and it’s still fraught with problems even two years later.

Even if the government did provide a magical software that could integrate with all the hundreds of channels that online sellers sell through (not to mention their own websites and POS systems at their brick and mortar stores), and then deal with every state department of revenue’s disparate rules, it isn’t certain that these businesses would have the technology or skill to implement it. The companies that would be harmed by the Marketplace Fairness Act of 2015 are not large retailers with a staff full of accountants and IT techs. They’re small businesses that work hard every day to get by. They don’t have time for a technological boondoggle.

The Economy Stagnates

Some states are harder to deal with than others when it comes to sales tax. What if, rather than deal with a huge sales tax compliance headache, some sellers opt to simply stop selling into certain states? Competition withers. Prices go up. The economy stagnates and millions of eCommerce sellers lose their livelihoods. Suppressing our nation’s economic engine with prohibitively complex regulation is never the right solution.

We here at TaxJar are against the Marketplace Fairness Act of 2015. This legislation was just introduced last week, but we’ll keep an eye on it as it moves through committee, and we’ll keep you posted, too.

Can you imagine a world with the Marketplace Fairness Act in effect? Let us know your thoughts in the comments.

Start your 30 day free trial of TaxJar. No credit card required.

Cached Query Manual Filing?filterByFormula=OR({State} = "") needs refreshing in 193