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.

 

3 comments

  • Avatar for Lucinda Rowlands

    Since it’s inception in 2001, SSUTA governing board has met ovr 26 times, broading the rules from a few pages to several hundred. One of the last meeting was to see if chocolate fondue would be tax classed as candy, a food item, or a prepared food.

    SSUTA has yet to establish a unified data base of taxibility items, as the qualified CSPs each have their own software databases incapable of talking ‘nice’ to each other.

    Compliance costs to small business is cost prohibitive. Statrup costs to small online business, according the the TruST study range from $80K-$300K, and none of the software proposed integrate with bookkeeping software.

    Last, and most importantant, the numbers of ‘uncollected’ tax spouted by NCSL ($23B) is based on false data. According to Pricewaterhouse, 83% of online sales are made by BigBox.coms that collect Sales Tax now, leaving the true number of uncollected tax at less than $4B..

    • Avatar for Lucinda Rowlands

      Great comment Keith, you really know your stuff. SSUTA seems like a real non-starter and the MFA reads to me like a bill that’s sole purpose is to give the paper tiger that is the SSUTA some teeth. The whole system is flawed to the core and making new laws around it is the opposite of simplification.

      If lawmakers really wanted to simplify sales tax, all sales taxes would be origin based so that the retailer would only have one rate to deal with.

  • Susan Lindsey says:
    Avatar for Lucinda Rowlands

    Amazing how local Chamber of Commerces are supporting this act without understand the facts!

    The Internet comprises 6% of all retail. Of that 6%, the big retailers (Wal-Mart, Amazon, Best Buy, Home Depot, etc.) dominate 90% of sales and ALREADY pay sales taxes. That leaves $23 billion gross sales (less than 1/4 of 1% of all retail sales) that’s owed almost exclusively by smaller online sellers. The less than $4 billion use tax (not sales tax) that would be collected by your state Internet sellers & others throughout the country & then remitted to 46 states, 600 Native American sales tax districts, and territories would be less than the cost to the small businesses and the implementation costs that would have to be paid by state tax payers (yes, yet another meaningless new tax at the state level that would subsidize the growth of the big retailers who won’t be affected by the Marketplace Fairness Act and lobbied the Senate with over $50 million to get the act past because it would destroy their small business competitors).

    If you pass the MFA, you are working right into the hands of big government and big retailers. Nothing will be leveled for your local small businesses who should be doing exactly what the big retailers are doing, getting on the Internet to increase their sales. Except that you’ve now created a great disadvantage for any busienss that has only one physical presence and can’t pay sales tax as is the case with big retailers that have physical presence all over the country. Becoming the collector of use tax for out of state buyers and remitting all over the country requires that merchandise be coded according to 13,000 different extremely variable sales tax districts all over the states and be subject to audits from 46 states. It places huge burdens on smaller online sellers who will be forced to go out of busienss. And it creates huge advantages on the big retailers that have already destroyed small local community businesses.

    Better be careful what you wish for. Now is the time to learn more about how evil this tax is and oppose it. If it passes, it would open up the Internet for all types of big government regulations and taxes and all kinds of big busienss fees. It would destroy the free Internet! https://www.facebook.com/OpposeInternetSalesTaxes?fref=ts

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