The Marketplace Fairness Act of 2013: Who Gets To Be A Tax-Collector For The U.S. Government?

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The Marketplace Fairness Act of 2013 
Who Gets To Be A Tax-Collector 
For The U.S. Government?

What Are Compliance Costs for Online Sales Tax?

Depending on who one asks, an online sales tax will either have little to no impact on the retailers tasked with collecting it, or the compliance costs will be so large that many small- and mid-sized businesses will be forced to shut down.

With the Senate passing the Marketplace Fairness Act, proponents and opponents of the online tax are gearing up for a battle in the House, where the measure could face more resistance than it did in the Senate, even though it enjoys bipartisan support.

The bill would require online retailers to collect taxes in the states where their customers reside and in which they have no physical presence. It will apply only in states where sales taxes are collected, and also would be collected on orders made through catalogs or by telephone.

The bill requires states to first simplify their tax-collection methods before they can collect online taxes, and gives them two ways to comply with the provisions.

One is by agreeing to adopt the simplification measures of the Streamlined Sales and Use Tax Agreement, which has been adopted by 24 states–and would require them to pay for software that remote sellers will need to collect the tax and remit payment to the states.

The other way is for a state to agree to five simplification requirements, including providing free software to retailers to comply with the law, or reimbursing them for the cost of buying and operating a tax-collection system (and holding them blameless should errors occur); establishing a uniform tax rate throughout the state; and agreeing to charge the tax rate in the state where the customer resides, not where the retailer is located.

Because the bill includes an exemption for online retailers with gross sales of $1 million or less, and because large Internet retailers like Amazon.com won’t see the cost burdens of compliance as a serious problem, the burden will be felt mainly by small- and mid-sized retailers.

The burden for compliance could be very expensive–enough to drive these mid-level retailers out of business, said Brian Kirkell, a retail tax expert at assurance, tax and consulting services firm McGladrey.

The Streamlined system creates too many options for states to consider, and the more the states have different rules, the higher the costs will be for the retailers to comply, Kirkell said. Those costs will include return preparation, cutting checks or issuing electronic funds transfers.

Even though both options require the states to supply compliance software to remote sellers, Kirkell said this doesn’t address the true risk to online retailers.

“Nothing in the legislation simplifies or promotes uniformity in the determination of what, and to what extent, transactions are taxable, leaving many technical issues up to the adopting states,” Kirkell said. “As a result, 50 states applying the MFA could easily have 50 different sets of laws, many of which could be designed to be prejudicial against remote sellers without running afoul” of the law or the requirements to qualify for the Streamlined option.

Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, which studies fiscal policy and public programs that affect low-income people, said the available software and cloud-based compliance systems make it easy for retailers to calculate the tax to charge each customers into their online shopping-cart systems, to collect that tax and then remit an electronic payment to the state where the customers lives.

By making state sales taxes uniform for all cities and counties in a state, and by requiring states to offer free software or reimburse retailers for their costs, he said the arguments against the tax don’t hold up.

“It’s understandable if a business has never has this requirement before, of course they are going to object,” Mazerov said. “In terms of this being a huge compliance burden, that is exaggerated. There are hundreds, probably thousands, of companies that have had to collect taxes on a nationwide basis for a very long time, and there are an increasing number of companies providing software or cloud-based services and it works.

“If it doesn’t work, if the states don’t furnish the remote sellers with software that works, they don’t have to collect the tax.”

Large online retailers like Amazon and brick-and-mortar retailers support the tax, Amazon because it thinks it will gain sales as these small- and mid-sized retailers fall by the wayside, and the brick-and-mortar stores because they will be better able to compete with online sellers and catalogs that now undercut them on price, Kirkell said, adding he doesn’t think the tax will benefit brick-and-mortar stores as much as it will Amazon should a tax become law.

“I see a situation where a lot of the $1 million to $10 million retailers fold up shop or heavily limit where they’re willing to sell. Many would fold up because the small margins don’t justify the compliance costs,” he said. “Where will that business go? To the large online retailers. It won’t go to the brick-and-mortar stores based on price. Amazon still is going to beat brick-and-mortar stores on prices, and it won’t have to compete with the smaller online retailers. Somehow, we’re all going to pay more.”

Online retailers who do not qualify for the Small Seller Exception (described below) will be required to collect sales tax starting the first day of the calendar quarter that is at least 180 days after the date of the enactment of the Marketplace Fairness Act. On this date (which could be as early as January 1, 2014), sales tax collection will be required on all sales shipped to the 22 states that are "Full Members" of the Streamlined Sales and Use Tax Agreement (SSUTA).

A Full Member State is a state that is in compliance with the Streamlined Sales and Use Tax Agreement through its laws, rules, regulations, and policies.

An Associate Member State is a state that is in compliance with the Streamlined Sales and Use Tax Agreement except that its laws, rules regulations and policies to bring the state into compliance are not in effect but are scheduled to take effect no later than 12 months after becoming an associate member.

To qualify for the Small Seller Exception a retailer must have less than $1,000,000 of total remote sales (in the United States) within the preceding calendar year.

A Remote Sale means a sale of goods or services to customers in a state where a seller does not have adequate physical or economic presence to establish nexus.

SSUTA Full Member States:

Arkansas

Georgia

Indiana

Iowa

Kansas

Kentucky

Michigan

Minnesota

Nebraska

Nevada

New Jersey

North Carolina

North Dakota

Oklahoma

Rhode Island

South Dakota

Utah

Vermont

Washington

West Virginia

Wisconsin

Wyoming

SSUTA Associate Member States:

Ohio
Tennessee
Remaining states seeking authority require sales tax collection from remote retailers must enact state legislation to either:

* Implement the provisions of the SSUTA. After achieving Full Member status, that state will get collection authority on the first day of the calendar quarter that is at least 90 days after achieving Full Member status, or

* Implement the minimum simplification requirements described in the MFA. After enacting such legislation, collection authority will begin six months after the date of enactment, no earlier than the first day of the following calendar quarter.

IF TRUTH-IN-LABELING rules applied to Congress, the proposed law giving states the power to collect sales tax from out-of-state online retailers would be named the Marketplace Unfairness Act.

Sponsored by Wyoming Senator Mike Enzi and fast-tracked to the Senate floor, the legislation would strip away protections that have been in place for decades, unleashing tax-hungry states on merchants to whom they aren’t answerable and tilting the playing field against small Internet retailers.

Under existing law, any state can require businesses within its borders to collect sales taxes from their customers. That applies to shops on Main Street as well as to vendors doing business by mail and over the Internet. If you’re a seller physically operating within the Commonwealth of Massachusetts, for example, part of your job is to collect the requisite Massachusetts tax each time you ring up a sale in the state. At the same time, you can’t be conscripted into serving as a tax collector for states to which you have no physical connection. The Supreme Court has repeatedly affirmed that merchants must have a “substantial nexus” with a state — such as offices, a warehouse, or a sales force — before they can be compelled to collect taxes on that state’s behalf.

In practice this means that a brick-and-mortar retailer only has to calculate the sales tax charged by its own state. A bookstore at the Cape Cod Mall collects the Massachusetts sales tax of 6.25 percent; it makes no difference whether the customer at the cash register lives across the street or across the country. Online and mail-order retailers play by the same rules: If they have a physical presence in Massachusetts, they’re responsible for any sales tax payable to Massachusetts. Neither traditional retailers nor Internet retailers are obliged to collect taxes for states they don’t operate in. Fair’s fair.

But if Enzi’s bill becomes law, fairness goes up in smoke. Online merchants would become revenue collectors for every sales-tax jurisdiction in America — an estimated 9,600 of them, each with its quirks and quiddities. No longer would Internet retailers based in Massachusetts be liable only for sales taxes owed to Massachusetts. They would have to calculate and remit taxes owed to Tennessee and California and Wyoming and New Jersey, charging different levies for different customers, and somehow keeping up with the ever-shifting kaleidoscope of sales-tax rates, definitions, exemptions, and deadlines.

Yet the owner of the brick-and-mortar shop around the corner would go on as before, charging only a single tax rate and remitting taxes to only a single state.

Supporters of the legislation promise that this will all be less onerous than it sounds. The bill includes simplification mandates such as free tax software, and it encourages multistate cooperation in streamlining tax rates and centralizing revenue collection. MarketplaceFairness.org, a website created to promote the Enzi plan, offers the assurance that with modern technology, Internet retailers have nothing to fear. “Keeping track of a few thousand local tax rates,” it says soothingly, “is no longer an insurmountable technical, administrative, or financial burden.”

For mammoth retailers like Amazon or Walmart, the prospect of juggling “a few thousand local tax rates” may not be an intolerable burden. For countless smaller online businesses, however, it could be the kiss of death. And what happens when the technology turns out not to be quite as cheap and easy as advertised? Writing in the Wall Street Journal last summer, Overstock.com’s CEO, Patrick Byrne, and president, Jonathan Johnson, warned against complacency.

“It took our team of 20 to 30 experienced IT professionals 9,412 hours over five months to install, test, and integrate the software that let us properly calculate use tax in one additional state. The annual software license fees for the first year, the internal and external development and installation costs, and the cost of collateral hardware and software came to $1.3 million. And that’s just for one state.”


Whatever inequities may exist in the current system, the proposed legislation would be much worse. There is a crucial reason why merchants have been required to collect taxes only for states with which they have a “substantial nexus.” Anything else would be taxation without representation. States cannot be allowed to reach beyond their borders, imposing tax obligations on retailers who had no vote in the matter, no political recourse, no opportunity to be heard. Against such antidemocratic unfairness, Americans once fought a revolution.

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