Will the Marketplace Fairness Act simplify sales tax regulations?

sales tax regulations

sales tax regulations

Marketplace Fairness Act Header

History suggests think again

Congress is currently debating the Marketplace Fairness Act which in theory will create a standard set of rules for online retailers to collect sales taxes. Right now, laws are different in each state which makes compliance confusing and difficult, congress is hoping that the Marketplace Fairness Act will simplify sales tax regulations.

Supporters of the Marketplace Fairness Act say this bill will create a level playing field for retailers across the nation. Sound almost too good to be true? It very well could be considering the lack of impact we’ve seen from the similar Streamlined Sales And Use Tax Agreement.

sales tax regulations

Will the Marketplace Fairness Act simplify sales tax collection as stated in its reason for existing?

What is the Streamlined Sales & Use Tax Agreement?

The SSUTA is an agreement that tried to create a standardized set of sales tax laws across multiple states. It was designed to make it easier for companies operating in different states to stay complaint. The SSUTA also tries to encourage online retailers to follow the same sales tax laws as brick and mortar businesses to supposedly make things more fair. Where have we heard that before? The SSUTA has many of the key goals of the Marketplace Fairness Act. The big difference is that the SSUTA was only approved by certain states whereas the Marketplace Fairness Act is a federal bill on the national level.

Where the SSUTA ran into problems

So what happened with the SSUTA? Well, while the crafters of this agreement wanted it to go national, they ran into participation issues. Forty four states helped put together the legislation for this bill which was a promising start. However, only 24 of these states actually passed the legislation to make the act state law. That means just 33% of the U.S. population resides within a SSUTA state. What’s even more problematic is that none of the six largest states, for various reasons, are part of this group.

As a single example of how complex this  lack of coordination could end up being, New York is embroiled in a long standing legal issue  over the laws for defining nexus. Nexus is the way state governments determine whether a business has enough of a presence within the state where it needs to register and collect sales taxes. In the past, this was based on whether or not the company had a physical location in the state. Now that we live in the digital age, state governments have broadened the nexus definition and this is where things can get messy.

While the SSUTA has a set of rules defining nexus, the New York legislature still has the freedom to make its own rules. One controversial law in New York says that just getting a click-through referral from an affiliate in the state is enough to create nexus. In other words, if a New York-based company with a web site accepts a fee to refer a customer to Amazon, Amazon in theory would need to collect New York taxes on the sale.

This is both extremely difficult to track and very different than what other states have agreed to. Amazon and other online retailers are challenging this law with the Supreme Court.

Will history repeat itself?

So the SSUTA, which has been under development for no less than a decade, hasn’t even gained acceptance by half of the country. As it is currently written, the nation-wide Marketplace Fairness Act is obviously going to have a difficult time clawing its way through opposing forces in Congress. The MFA is geared toward enforcing out-of-state sales tax collection for states participating in the SSUTA and gives non-participatory states the ability to opt out of the agreement. As a result, this bill is more of a guideline than a federal law and stands to make sales taxes more complicated rather than less.

We’re still a ways away from seeing the Marketplace Fairness Act enacted. The House has time to make changes and they probably will. Whatever happens going forward, it’ll be worth watching to see if Congress makes participation mandatory. Otherwise the MFA could turn into another toothless tiger.

 

Does “Main street Fairness” amount to taxation without representation?

Main street Fairness

Main street Fairness

By Charles F. Spielmann, Zip2Tax

Main Street fairness and streamlined sales tax… What could sound more appealing?

Who’s going to argue against fairness? I mean, you can hardly go wrong when you’re supporting good ole’ Main Street with its suggestion of American flags flying outside Mr. Whipple’s local grocery store. And streamlined is better, right? It sounds like taxes will finally be standardized and made easier to comply with. Right?

But, it’s never quite that simple, especially when you’re talking about collecting sales tax.

At issue is the Main Street Fairness Act, its current form still bouncing around congressional committees. The bill is intended to compel online retailers to collect sales taxes on purchases made through their web sites regardless of whether that retailer has a physical presence in that state. If signed, it would be implemented in the 24 states that have adopted the Streamlined Sales and Use Tax Agreement (usually shortened to SSTA).

This language is all carefully designed to put the proposal in the best possible light. It will purportedly “level the playing field” for “brick and mortar” establishments, who feel they’ve been at a competitive disadvantage against online competitors.  The bill states that its aim is to collect taxes only from super-sized web retailers and that small businesses will have an exemption. (Read: smaller businesses aren’t worth the trouble it will cost states to pursue until after the big fish have been fried up.)

Not promoted quite so openly is the $18.6 billion in sales tax the SSTA states estimate has not been collected on their behalf from 2010 alone. States with frightening budget shortfalls are unlikely to let any amount of income slip through their fingers.

Another glossed-over fact is that, if the Main Street Fairness Act becomes law, there still wouldn’t be a uniform tax code since it would only affect the states that have agreed to the SSTA. The Streamlined Sales Tax agreement isn’t as beneficent as it sounds at first blush either. The agreement claims it is an effort to simplify the sales and use tax process in a cooperative effort of federal, state and local governments to reduce the cost and administrative burdens on retailers who collect sales tax.

The SSTA doesn’t boast that for all of the added levels of bureaucracy it creates, none of the tax rules have been made, in fact, streamlined. Each of the 24 participating states still determines its own tax rates, tax jurisdictions, and the taxability of certain items and services.

The only real progress they’ve made is agreeing to standardize some definitions of taxability. What’s buried in the fine print is that while SSTA is voluntary so far – offering limited amnesty and audit protection to retailers who sign on to collect sales taxes across state lines – this may not always be the case and non-compliers may be pursued. As pointed out in an analysis by Fosters.com’s Curtis Barry, this bill, if passed, would amount to taxation without representation. He noted that the Streamlined Sales Tax Commission is made up of office holders and bureaucrats from SSTA states. These board members are not elected but appointed by unstated means. Barry also pointed out that “It is troublesome that this commission could lower the threshold [on the small business exemption] whenever the states that have signed on to the SSTA need money.” He noted that the commission may also have the power to make other unspecified policy changes that could affect states while the states and their businesses would have no say in the matter.

You can bet that online retailers didn’t have much nice to say about the bill either.

Not unexpectedly, mega-web site eBay has a full-blown movement against the bill. EBay sent messages to every one of its users and asked them to sign a petition opposing the bill which they claim is anti-small business.

EBay’s vice president for government relations, Tod Cohen, called the bill an Internet tax scheme and warned that “… supporters of increased Internet sales taxes recommend legislation that would impose significant new costs on hundreds of thousands of online small businesses and e-commerce entrepreneurs, which is sure to harm the economy and kill small business jobs.”

You might be tempted to  get a warm, fuzzy feeling about how concerned eBay is about the welfare of all of these small businesses. But, if you think about it, you can be pretty sure that eBay isn’t motivated by purely altruistic reasons. As they said it themselves, they see the Main Street Fairness Act as “an unfair and costly burden for small businesses …” (not to mention big businesses), “… to collect sales taxes for 15,000 tax jurisdictions in 45 states.” The source of EBay’s jurisdictional numbers is somewhat questionable, but their incentive remains clear enough.

So eBay, Amazon, and other huge online retail coalitions are arming for what’s likely to be another bitter and drawn-out war against both the government and brick and mortar retailers who would like to share the oppressive tax burden with as many others as possible.

But maybe it’s worth noting too that Main Street’s Mr. Whipple – of the discontinued “please don’t squeeze the Charmin” advertising campaign – wasn’t quite the local small businessman he portrayed either. He was the creation of the Fortune 500 company Proctor and Gamble who,  in 2007, spent $2.62 billion on advertising, more than any other company in the U.S. Main Street Fairness Act will affect brick and mortar retailers

In the end, the fate of this legislation isn’t likely to be decided by Mom and Pop Main Street, Mr. Small Online Business, or John Q. Public. The debate will be framed by mega companies with their PR agents, marketing departments, and hired guns pitting their resources against state governments, special interests and high-paid lobbyists.

And, regardless of the outcome, the money that will be fueling the battles will all be coming from the same place: you!

The bill has changed names with each new congress, but you should be able to follow the latest version by searching at opencongress.org.