The Marketplace Fairness Act continues to gain momentum in Congress. On May 6th, the U.S. Senate passed this bill by a vote of 69-27. This puts the United States that much closer to collecting sales taxes on remote sales. The current Senate bill gives an idea of what this future tax environment could look like for every U.S. business.
Applies to nearly every business, not just internet retailers
While the Marketplace Fairness Act (MFA) is discussed as a bill impacting internet retailers, it could have implications for nearly every business making out-of-state sales. As written, the bill says it applies to “remote sellers” and doesn’t use the words “internet” or “online” anywhere. This creates a very broad definition and could include any business that makes sales in any state where it does not have nexus, which would apply to both brick and mortar and online retailers.
Small seller exemption
The current bill has a provision that would exempt retailers if their prior-year gross U.S. remote sales total less than $1 million. Any business making sales in states it doesn’t already collect tax in totaling $1 million or more collectively would be subject to collect and remit taxes to any state that has collection authority – chiefly the states signed on to the Streamlined Sales Tax Agreement. This gross total includes all sales, not just taxable sales. There is also no minimum sales amount per state, meaning that even a single $10 sale would require the remittance of the tax along with a sales tax return.
Concerns over foreign competition
The motivation for the MFA is that it is supposed to level the playing field for brick and mortar retailers by taking away the “unfair advantage” internet sellers have enjoyed by escaping out-of-state taxation. However, some critics are wondering if this law would now simply shift this advantage solely to foreign companies.
Right now, the bill doesn’t say whether non-U.S. based companies will be expected to collect sales taxes from American consumers. If they don’t, foreign retailers would have an advantage over American retailers. This could also create an incentive for American companies to move overseas.
What happens next?
Now that the MFA has cleared the Senate, it moves on to the House of Representatives (H.R. 684) where it will go through a formal committee review before it is brought to the floor for a vote. During this stage, the bill could be changed significantly or could stall completely. Some believe the bill is likely to pass the House as it has a fair amount of momentum and lobbying power behind it. On the other hand, several key representatives have voiced strong opposition to the bill and could take steps to block or alter it during review.
What is particularly important to retailers is what happens to the small seller exception. There is a push to raise the minimum sales amount so more businesses would be exempt from the requirement to collect the tax.
While the MFA still has a long way to go before becoming law, it’s now gone farther than any of the other internet sales tax bills that have come before congress to date.
We’ll post updates as this legislative process continues or you can follow the bill’s progress.
Lucinda Rowlands has been the general manager at Zip2Tax since 2010. She has extensively researched sales and use tax regulations in order to help small businesses navigate complicated tax rules.