Will the Marketplace Fairness Act simplify sales tax regulations?
sales tax regulations
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.
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.
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.