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What Online Retailers Need to Know about the Marketplace Fairness Act

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On Monday, May 6th the Senate voted 69 to 27 to pass the Marketplace Fairness Act, a bill that requires retailers with revenues of $1M or more to collect state sales tax on online transactions for tangible goods regardless of where they are located. The bill also outlines requirements for states to simplify their state tax laws before they can collect taxes to ease the burden of supporting multiple state tax codes for online retailers.

Sponsored by Sen. Mike Enzi, a conservative republican from Wyoming, the bill has received support from President Obama,, brick-and-mortar retailers including Best Buy Co., the National Retail Federation, the National Conference of State Legislatures and hundreds of other federal, state and local trade associations and business. However there has also been major push back from online merchants, led by eBay, and anti-tax advocates such as Americans for Tax Reform and the Heritage Foundation.

Although the bill passed relatively easily in the Senate, the House Judiciary Committee vowed to take a closer look at the bill to determine whether or not the bill is really “fair.”

The argument for:

Supporters of the Marketplace Fairness Act argue that brick-and-mortar businesses have already dealt with a 5-10% price disadvantage for years because online retailers were not required to collect tax and this bill closes that price gap. They also view this bill, not as a tax increase, but as a way to enforce an already established tax. Technically, consumers are supposed to report unpaid taxes on online purchases but almost no one actually does.

The argument against:

Online retailers feel that the so-called “internet tax” places undue burden and cost on online retailers. Brick-and-mortar stores only charge state tax for the state in which they operate, no matter where the customer making the purchase is from. Meanwhile, the cost of supporting up to 9,600 tax codes is daunting for online retailers of almost any size, but especially for the small to mid-sized ones. Although there are free tax services available to support these transactions, maintaining them in companies where IT departments typically consist of just a few individuals could be prohibitive.

Furthermore, opponents contend that the burden of tax audits and the threat of state action could cripple a small business. Some worry that small businesses will restrict their own growth to stay under the $1M revenue threshold.

Despite their attempts to thwart its passage, opponents seem to recognize that the bill has support and are now arguing to increase the threshold to exempt small businesses from $1M to $10M (or 50 employees).

Impact to online sales:

If the bill passes, experts do not predict a major shift in the way Americans buy online. People are used to paying sales tax. So although there will likely be some complaints, it’s unlikely that it will affect actual sales. Although some hope the tax will reduce showrooming (when consumers go to stores to find products they want then buy them online tax-free), this behavior is not expected to change dramatically as selection and convenience still rank one and two as to why people shop online. The one area where online sales are expected to drop is on big ticket items. Consumers like to buy these items online to avoid paying a large tax.

Impact to online retailers:

24 states have simplified their tax codes by adopting the Streamlined Sale and Use Tax Agreement (SSUTA) and there are six Certified Service Providers, subsidized by the 24 states, which can manage the tax table and filing for online businesses.  While the measure brings in revenue for states and the certified solution providers, all the retailer gets from the process is a headache.  The retailer will have to implement a new solution to collect tax information for the 24 SSUTA states, and likely several more to support the other 26 states, many of whom may choose to provide their own free software solution. This means additional cost and human capital to implement, manage and maintain this new technology.

What’s next:

With the increased scrutiny by the House Judicial Committee, the bill could very well stall in the House or be reintroduced in a different form. And if by chance it doesn’t, the Supreme Court could strike it down. The Supreme Court has a history of blocking tax bills for online retailers, stating that merchants must have “substantial nexus” with a state (i.e. offices, warehouse or sales force) in order to collect taxes on its behalf so they receive the benefits of the taxes collected.

nChannel will continue to monitor the progression of this bill and its passage and look for ways to help customers manage their multi-channel environment to reduce complexity and maximize profitability.

by nChannel

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