Internet Sales Tax

Marketplace Fairness Act of 2015: Congress Still Clueless about Small Business

by Mark Faggiano

Marketplace Fairness Act 2015

The Marketplace Fairness Act of 2015 (MFA) is a slightly updated, equally harmful reboot of its predecessor the Marketplace Fairness Act of 2013. And it’s still missing one key ingredient: fairness.

This new bill would require eCommerce sellers who gross over $1,000,000 in remote (out-of-state) sales per year to collect sales tax from buyers in all 45 states (plus D.C.) that impose a sales tax.

Sellers would have to determine the sales tax rate for every sale in the United States’ nearly 10,000 sales tax jurisdictions and remit sales tax to the taxing authorities in each state. Basically, they’d have to understand 46 different sets of sales tax laws and learn 46 different systems.

The purported purpose of this act is to “level the playing field” between brick and mortar stores, who almost always have to collect sales tax, and online sellers, who sometimes don’t have to collect sales tax. Ask ecommerce merchants how fair it is and they laugh because they don’t want to cry. States would be the big winner here because they’re broke. They get new sources of revenue without having to tax their own residents.

But what the suits in Washington D.C. just don’t understand is the terrible compliance burden this law would place on the people who drive this nation’s economy – our nation’s small businesses.

Congress doesn’t get that:

1.) ECommerce Businesses ARE Mom & Pop Businesses – One argument you’ll see proponents of the MFA make time and time again is that “eCommerce businesses” are putting your local mom & pop businesses out of business.

Guess what? These days Mom & Pop aren’t selling egg creams at the soda fountain. It’s 2015. Mom & Pop are selling housewares on Amazon and collectibles at antique malls using their Square reader. When you impose unfair regulatory burdens on “eCommerce” you don’t hurt Wal-Mart, with its army of accountants. You hurt Mom & Pop who find themselves spending valuable time wrestling with the burden of sales tax compliance.

2.) One Million in Gross Revenue Doesn’t Mean What You Think it Means – Margins in eCommerce are tiny. And thanks to overhead, platform and payment processing fees, logistics, increased competition and yes, unreasonable regulatory compliance burdens, profits are only getting smaller. An eCommerce business with revenue of one million may be enough to sustain Mom & Pop, but it certainly isn’t enough to employ a full time accountant to deal with the sales tax burden the MFA would place on this business. Congress doesn’t get that increasing the sales tax burden even further could cripple an e Commerce business of this size.

3.) The Burden of Tax Collection isn’t “Minor” – And Congress isn’t the only branch of the Federal Government that doesn’t understand small business. The Supreme Court has also shown themselves startlingly tone deaf on the issue of “internet sales tax.” In his concurring opinion on the Direct Marketing Association v. Brohl decision earlier this month, Justice Anthony Kennedy referred to imposing a “minor tax collection duty.”

Nothing about navigating 46 different sets of sales tax laws, figuring out the wildly varying sales tax rates at the point of origin of ever single sale, and calculating sales tax collected in nearly 10,000 sales tax jurisdictions is “minor.”

It’s clear that the only people who consider sales tax collection a “minor” duty are people who have never had to try to navigate it themselves.

4.) Free Software isn’t a Magic Bullet – Congress also doesn’t get that “software” isn’t a cure-all. As someone who has made a living building technology companies that solve backend administrative problems for small businesses through software, I’m particularly positioned to see that software doesn’t have all the answers.

Case-in-point: The Healthcare.gov site. While that site was complicated, it was far less complicated than dealing with 45 states and thousands of sales tax jurisdictions. And that’s not to mention that, in order to collect sales tax at the point of sale like the MFA specifies, it would have to integrate with the thousands of channels online sellers use to sell their products.

And just because software is “free” doesn’t mean a small business owner has the time or tech acumen to implement it. My company, TaxJar, makes a product that helps online sellers by automating sales tax compliance. If the Marketplace Fairness Act of 2015 passes, we would most likely make a lot of money. But we are fully against the MFA because our mission is to make life easier for online sellers. Dealing with sales tax is hard enough for our users without adding this extra layer of chaos in the mix. Congress needs to talk to the folks that would be affected by this law and learn what fairness really means.

Do you have an opinion about the Marketplace Fairness Act of 2015? Say your piece in the comments.

  • Joe

    Everyone who cares about American entrepreneurs being able to start a business without drowning in tax paperwork should read Mark’s post above.

    Thanks Mark for doing the right thing on both sides: 1) working hard to build a software and services company that makes the terrible burden of multi-state tax filing easier. 2) Honestly describing the cost of turning America’s small businesses into tax collectors for the 50 states — each with its own unique rules, forms, nuances, and auditors.

    America’s innovative businesses are online, selling nationally and globally. They are all affected. And as you say, $1M in revenue in the online retail world is usually the company founder struggling to do the books. With the low margins online (by definition, you’re competing against the world), they often haven’t cleared enough to hire the first employee yet.

    We’re all ashamed that so many senators and congressmen support the MFA which would give the USA the most complex and expensive indirect tax system in the world, permanently stunting innovation and entrepreneurship. It’s a huge credit to you that you’re willing to describe things as they are, even when complexity is arguably in TaxJar’s self-interest.

    Maybe someday congress will get serious about simplification. Maybe they’ll only allow states to turn our nation’s small businesses into tax collectors if in return the states have to align with one filing system, one set of rules, one system for audit. And maybe with the federal enforcement required for Chinese and other non-USA sellers who would just ignore the states and gain a huge advantage over American online businesses if the MFA passed.

    And I hope TaxJar is there, building a hugely successful business enabling hundreds of thousands of US and non-US sellers to get their taxes done right — connecting data from hundreds of online carts and dozens of accounting systems, and reconciling it into filings via *one* sales tax filing system that covers all the US states.

  • Roger Pol

    Mark, I sell in Amazon via FBA. I live in MA. My business llc is set up in Wyoming. Not sure what fulfillment centers my inventory is in. Now do I pay sales tax, in MA, Wyoming plus inventory places or MA and inventory holding states. Wyoming has no store or inventory. Thanks.

  • Keith Yockey

    Mark is dead on in his comments.

    What I would like to add are the compliance costs. Most sellers sell online using more than one platform, including eBay, Amazon, Websites and other selling venues. While most tax software programs offer autofiling of Sales Taxes, what they can’t do is provide this service for those that sell multi-platform. Amending returns is complicated. It should also be noted that Amazon uses one service provider, eBay would use another, and choices for a website may be limited. The problem here is that no two Certified Service Providers (CSPs) share the same taxibility database. Lawmakers claim the software would be free, but businesses would have to install the software (a cost) code the inventory for taxibility status (another cost) maintain the system for tax updates or tax holidays (a cost) as well as answer demand letters/audits from the Several States (another cost) Worse is that this same task would be needed for each selling venue.
    If a State chooses to use their own software, will California’s software integrate with New Jersey’s software?

    These are just but a few of the problems with this legislation.

    • Great point, Keith. And we totally agree with you. Software just isn’t a magic bullet in this situation.

  • Thanks for your comment, Joe. We didn’t even touch on some of your points – including potential advantages for international sellers and how simplification would be a better answer than this boondoggle. We really appreciate you taking the time to read and respond!

  • Hi Roger, You’d pay everywhere where you have nexus, and having a business registered in Wyoming most likely establishes nexus there. I would recommend calling the Wyoming Department of Revenue to confirm, because you never know. They might not require you to charge sales tax. As always, we can’t give advice specific to your situation, only general tax advice. So definitely contact an accountant if you have specific questions. Here’s our list of accountants we like to work with: http://www.taxjar.com/sales-tax-accountant-directory/

  • Derek

    As an FBA seller, we collect and remit in about 14 states where we have inventory located in Fulfillment Centers (sellers can obtain the report by downloading the Daily Inventory History in the Fulfillment section under the Reports tab in Seller Center). What makes matters worse is once registered for Sales Tax, the states then want MORE taxes. We are now receiving demands from Kentucky, for example, to file and pay Personal Property tax on our inventory there on January 1, and also to file and pay income tax! (Note: Some entities are excluded from the corporate income tax such as most banks and trust companies, savings and loan associations, production credit associations, insurance companies, and certain printing corporations…”lobbying works, no doubt). It has to stop somewhere. Instead of encouraging collections, the states are doing their best to make is such a burden, that many small companies will fold, and many others will simply ignore them and try to fly under the radar.
    They could make it very simple, by having ONE state rate that approximates the average overall rate in that state, for all out of state sellers. The actual difference in any local jurisdiction would be very small, and not enough to cause somebody to buy something online or in a bricks and mortar location strictly on the tax amount. But by simplifying the process, there would be a LOT more compliance, and the states would actually receive more. But they should also be forced to stop trying to bully small businesses by the threat of having to pay other taxes when they really have no presence in that state at all.
    Overall, a great article, thank you.

    • Thank you for telling us your story and your thoughts on simplification. We really appreciate you taking the time to comment, and we totally agree with you. We’ll continue to keep everyone updated on the new MFA 2015 from here, and hopefully get it defeated!

  • johnny

    This almost makes business not worth doing. All this just to make a couple bucks? Might as well live on a farm.

  • Small Business

    I just stumbled across this article while trying to find out if there has been any progress on the Marketplace Fairness Act. I am the owner of a small business that is literally on it’s last leg due to losing sales to sales tax. We have been losing on average of $4300 per week in sales to out of state competitors over sales tax. That is a significant loss for a business our size. To be competitive, we operate on profit margins in the area of 10%. Our local sales tax rate is 6.75%. We regularly beat our competitors price but still lose the sale because after sales tax, our price is higher. We attempted to counter these losses by marketing out of state customers online but after 2 years, we realized that we simply can’t afford the cost of internet marketing like our big online competitors. We can be found locally but 70 miles away from the store, we are nowhere to be found in the search results. We are a small business that would definitely benefit from the passage of the Marketplace Fairness Act. Just wanted to throw our two cents out there.

  • Hi there, Thanks for your comments and letting us know how your small business is faring due to sales tax. We still strongly disagree with the Marketplace Fairness Act, but do appreciate you letting us know another small business owner’s side of the story.

  • Frank
  • jason

    As someone who is in the process trying to build a little business selling vintage clothes and other goods through eBay this is so discouraging. If it passes, it will probably not make it worth the effort to continue. So depressing as things are really starting to go well. It really shuts down all avenues for eCommerce for a one man business. Doesn’t matter if it is eBay, Amazon, Etsy or a independent eCommerce site the little guy will be done. I barely have enough time to shop for product, list product, ship and pack. It would just add so much time and stress to the process. If they are going to do anything, the tax should be paid to the state where the product is sold from, so we only have to pay one place. I would guess the big business have already dumped enough cash into this that us little guys are about to be out of business. Probably a really good time to short eBay stock.

    • Hi Jason,

      Fortunately, there hasn’t been much real activity on these. You always start to hear about them during big eCommerce holidays like Cyber Monday, and there has been some talk that Paul Ryan will resurrect this bill or a similar one, but I don’t think we have to worry about this passing until after the presidential election at least. We totally agree that this bill and another like it, the Remote Transaction Parity Act, would be devastating for small businesses.

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