Senate Thinks Marketplace Fairness Act is Fair, But Do You?

As the industry of online shopping grows, state sales tax collected is decreasing. Online retailers are currently not required to collect a state sales tax on transactions occurring in states where they have no physical presence. In some states customers are supposed to pay sales tax at the end of the year when they report their online purchases. However, because most people do not report their online purchases like they are supposed to, the state governments are not receiving all of the sales tax they are owed. To fix this problem the Marketplace Fairness Act was developed. 

The Marketplace Fairness Act (MFA) gives states the power to force online and catalog retailers to collect sales tax at the time of transaction no matter where their businesses are located. The bill is written so that only online companies who make over $1M in out of state revenue are required to pay sales tax. More companies than you would think fit under this qualification because it is based on the Gross Merchandise Value (GMV). GMV is used in online retailing to calculate revenue sold through a marketplace, including fees paid to the marketplace. While a retailer may have a GMV over $1M, their profit is much less. However, in order for states to be able to collect tax from online retailers they must first simplify their sales tax laws. Simplification is required because there are many concerns regarding the difficulty of collecting sales tax in so many jurisdictions. States are being given two options on how to simplify their tax laws. The first option is to adopt the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA has been under development over the last eleven years with the goal of making sales tax collection easy. This agreement minimizes costs for retailers and ensures all retailers operate their businesses in a fair and competitive market. The other option given to states is to make sure their tax laws meet the five mandates listed directly in the bill. One of the mandates requires states to provide free software to companies to process the collection of out of state sales tax. Scott Peterson, of the Streamlined Sales Tax Board, confirmed before congress that this software does not yet exist. According to the Main Street Alliance, even if the software did exist the cost of software integration and training each business would need to pay for would range from $20,000 to $300,000.

Creating the Marketplace Fairness Act is an attempt to create a fairer market between online retailers and street side businesses. However, as the future of online sales seems to be increasing the MFA will make it hard for smaller online businesses to compete with the larger businesses. Most small businesses lack the resources to file tax returns in 45 states, where as a company like Amazon has the resources to devote a group of people to solely work on state sales tax. For smaller businesses the cost involved with collecting out of state sales tax could exceed their profit; which could turn out to be detrimental. Due to the high costs this bill would impose on businesses it is expected that 220,000 jobs would be lost in just the first year alone, according to the Main Street Alliance. 

Currently, MFA has passed through the Senate and is now waiting to be passed in the House. According to Congressman Bob Goodlatte, the Chairman of the House Judiciary Committee, MFA is not likely to get through the House of Representatives and House Republicans are working on creating their own version of the bill.