What the Marketplace Fairness Act Means for Ecommerce Merchants

What the Marketplace Fairness Act Means for Ecommerce Merchants

feature

You might have already heard about the Marketplace Fairness Act (MFA), also known as the “Internet Sales Tax.” It’s a bill that recently passed the United States Senate and will soon be before the U.S. House of Representatives. If passed through the House, the MFA would require ecommerce retailers selling over $1 million per year in states they do not have a physical presence to collect sales tax and pay taxes to each customer’s state and local government. Here’s what you need to know:

What is the Marketplace Fairness Act?

Right now, when a customer purchases something online and the retailer does not have a physical presence in the customer’s state, the merchant does not have to charge sales tax on the transaction. It’s up to the consumer to pay sales tax on all goods purchased online directly to their government at the end of the year. This is something that very few people do. 

Since most physical retail locations in the U.S. collect sales tax on everything they sell, this effectively makes products purchased at brick-and-mortar stores more expensive than products purchased online. The lack of “Internet Sales Tax” costs state governments an estimated $11 billion in lost tax revenue, and some say gives online retailers an unfair advantage over brick-and-mortar stores.

The Marketplace Fairness Act was designed to help brick-and-mortar retailers compete with ecommerce stores (hence the name, ‘fairness act’), and of course boost revenues for state and local governments.

Response to the Marketplace Fairness Act

On May 6th, the United States Senate passed the MFA with overwhelming support. The vote was 69-27, which was more than enough to send the Marketplace Fairness Act to the House for final passage. Many U.S. states support the MFA because it will result in increased tax revenue, and brick-and-mortar stores support the Act as a way to level the playing field with ecommerce stores.

Not surprisingly, the MFA is unpopular with most consumers and online retailers. Regardless of its intent, the MFA will likely make shopping online more expensive. 61% of respondents to a recent study said that they disagreed with the MFA. 60% said they would change their online shopping habits if passed, 44% of which claim they would buy online less often.

Here are more key findings:

Implications of the MFA for Online Retailers

First and foremost it’s important to remember that the MFA is still in the early stages and may never become law. Furthermore, as drafted the MFA exempts ecommerce businesses with revenue less than $1 million per year. Many online merchants simply won’t be affected and need not worry, but other ecommerce businesses will need to take note.

Here are some other things to consider:

  1. Traditional retailers (brick-and-mortar stores) only collect taxes where their stores are located. This process is fairly straightforward since there are only a few different tax rates to deal with. If the MFA is made into law, online stores would be forced to collect sales tax based on where their customers are located, which could potentially mean dealing with more than 9,600 different tax-collecting jurisdictions, if including state and local governments. Since each government has their own unique rates and rules, this will be a logistical nightmare. Example: In one city a chocolate bar may be considered a taxable good but in another jurisdiction it could be classified as food and not subject to sales tax. Also, there are many different city tax laws, like clothing and footwear under $110 is tax free in New York City, but if it's over $110 there is a 4.5% city sales tax and a 4% state sales tax.
  2. The MFA claims to have no effect on nexus. The bill is not intended to be an extension nexus — or connection — to a particular state. This clause is important since without it, states might seek to extend further jurisdiction over online business. Imagine being required to get a business license in every city in the United States.
  3. The MFA is not mandatory for states —each state will have the opportunity to become a member of the "Streamlined Sales and Use Tax Agreement," but no state will be required to do so. But as mentioned above, since becoming a member will likely result in increased tax revenue, it’s unlikely that many states would choose not to participate.
  4. The MFA requires states must simplify tax collection — states must participate in a new tax program, mentioned above as the “Streamlined Sales and Use Tax Agreement,” aimed at making tax collection easier. This clause was added when online sellers pointed out that there was nothing fair about a brick-and-mortar store collecting taxes in one or two jurisdictions while online sellers would have to collect them for many.
  5. The MFA requires states to offer free tax collection software — the bill also requires each state to provide any and every online retailer with free software meant to calculate and collect taxes. It isn’t clear how this software would work with ecommerce platforms or whether it would involve manual entry.

What’s Next?

Although the MFA passed the United States Senate with ease, the Act is less popular in the U.S. House — where it faces its next vote — so its fate is in the hands of the Republican-controlled House which is traditionally against new forms of taxation. There is no hearing or vote date set for the bill to be seen in the U.S. House. If the Marketplace Fairness Act does pass the House, it will move onto the desk of U.S. President who has already declared support. 

Share Your Opinion

We have a poll on our Facebook page. VOTE here and let us know what you think of MFA. 

26 comments

  • Liz
    Liz
    May 22 2013, 09:50AM

    Against, against, against!

  • Satchel & Page
    Satchel & Page
    May 22 2013, 10:25AM

    Brick and mortar can’t compete with online because their business model is BROKEN, not because of a 8-10% tax.
    Brick and mortar must adapt or they will be the next ‘Newspaper’ industry.

  • Abdul Haseeb Awan
    Abdul Haseeb Awan
    May 22 2013, 11:49AM

    It is complicated. We are based in Ottawa and 95% of our sales are made out of Canada. Currently, we have started to move our shipment warehouse to US. So Technically, it gets very complicated..

    A Canadian Company manufacturing in an Asian Country, Shipping from US office to an Australian Customer !

    With Bitcoins and other crypto currencies coming in place, I see it a very tough task for government.
    We should pay taxes to keep the system in place but at the same time, fair play should be done from all parties .

  • James Thompson
    James Thompson
    May 22 2013, 12:39PM

    I am opposed to increased taxes, but in all actuality many states already require out-of-state purchases that were not taxed to be subject to either use or sales taxes in the state of residence. So, for lots of purchases this law will simply create a means of collecting taxes that are legally owed without states having to pursue individual tax payers, which they simply aren’t doing right now.

    Also, I’m far less averse to a sales tax, or any other kind of consumption tax since I maintain control of my consumption and thus also have direct control of my tax burden.

    But, higher taxes are never enjoyable. So, my feelings are mixed, although mildly in favor of the bill.

  • Kurt
    Kurt
    May 22 2013, 04:26PM

    Hi Mark,

    Thanks for your post on this important topic. While your post was educational for many who were perhaps not aware of this bill, I felt that it would have been even more helpful if you went further with the subject and included the Shopify perspective. Perhaps a followup post would be possible.

    While it is true that this bill has not yet been passed into law, and while there is some debate as to the likelihood of this coming to fruition, many political analysts in the US believe that this bill will be passed into law in the near future. While the impact of this law on small business owners who utilize the Shopify platform will most likely be minimal due to the proposed $1M sales cutoff, there will some customers who will need to comply with this regulation.

    Given that, the most important question that can be discussed is what Shopify is doing to prepare for compliance with this regulation. As you state, the technological implications for building compliance into the platform are staggering. How would this issue alter the Shopify roadmap and what role is Shopify prepared to play in the creation of a solution to the problem? Clearly this is both a moment for both panic and excitement as software developers since the complexities of building such a system are immense. This would be a challenge of the highest order. But can you imagine the positive impact on the Shopify business if you were able to provide this feature in the platform? I can and it would make for one heck of a selling proposition for Shopify!

    Thanks again for your post. I look forward to your followup on this issue (at least with the results of the Facebook poll… I wonder what response will win?) Cheers.

  • Robert
    Robert
    May 22 2013, 04:42PM

    Sales taxes are unfair to lower income people and should be replaced with income taxes. People ought to be taxed on their ability to pay taxes not on the amount of milk and diapers their family buys.

    Or how about we go after the sketchy tax evasion practices of the international mega-corps like Apple, IBM, Google, and big oil. Collect the taxes due from just those ~10 companies and we’ll dwarf the $11B “lost” in sales tax revenue.

  • Demetrius Milton
    Demetrius Milton
    May 23 2013, 01:23PM

    This is a money grab for business models that are severely broken. It isn’t just brick-and-mortar stores backing this either. Very short sighted and a greedy move.

  • serg
    serg
    May 25 2013, 03:18AM

    Good article, sposibo the author, but I looked at a lot of articles on the topic of e-commerce platform comparison and I can say on the site http://adlbay.com/pmwiki.php?n=Website.Complatform there is a description of some e-commerce platforms

  • Sameer
    Sameer
    May 27 2013, 10:14AM

    Very useful information for someone who just started ecommerce like me with various tips and tricks which are a great help for future
    http://professionalwebsite-tutorials.in/

  • Kane
    Kane
    May 29 2013, 12:40PM

    This bill was crafted on a false premise and is a boon to Walmart and other mega-retailers. It will crush small internet businesses and keep small biz small forever. You can learn more at emainstreet.org and join the alliance of retailers who oppose this and are fighting back. Here are just a few issues you should be aware of.

    Small online retailers will pay between $20,000 and $300,000 in compliance costs in the first year alone. It will cripple all of us and some will be put out of business.

    The law’s complexity will overwhelm us, subjecting us to rules in more than 9,600 tax venues.

    The bill drastically increases our audit risk and exposes us to audits from remote states where we have no physical presence, no political representation, and no right to vote. We can be held personally liable and driven to personal bankruptcy for mistakes.

    Our businesses already experience significant disadvantages in the marketplace compared to physical sellers. Disadvantages including threats from software patent trolls, rising shipping costs, and reverse-showrooming. Our disadvantages will be exacerbated, putting some of us out of business. It could cost approximately 220,000 jobs.

    If we want to make things “fair” we should force Walmart to charge a “shipping surcharge” on every item that is bought in their stores.

    Make no mistake… this bill is the latest weapon in Big Retail’s war on small business.

  • Sam Oxby
    Sam Oxby
    May 31 2013, 07:13AM

    I’m based in the UK, so at present we don’t have any laws similar to this as far as I’m aware of, but surely the purpose behind online retailers was to reduce the overheads of new businesses, therefore in themselves generating more income for the nation at large, rather than individual states or counties.

    Numerous smaller businesses like http://www.britim.co.uk/ are online because they can’t compete with large corporations with massive department stores like http://www.staples.com/.

    Surely by introducing extra taxes, in essence what the government is doing is condemning small online retailers, actually decreasing overall retail sales and revenue?

  • matthew
    matthew
    May 31 2013, 11:22AM

    Today i like to share a real reasonable information.
    Using those “Cashback-Tips” we saved with our family about 12,000 USD in the past 12 month on the things we have to buy anyway and all our travels.
    This good kept secret is now revealed by a FREE EBOOK:
    http://topcashbacktips.com/cashmoney
    Get your Book now and find out, how to never ever pay the full price for everything anymore.

  • Sam
    Sam
    May 31 2013, 04:51PM

    I recently published on my blog some sales tax rules for Canadian merchants on how taxes should be charged because some merchants charge taxes based on their location without taking in consideration the customers’ location.

    Feel free to read and comment, I am eager to see some feedback.
    Here is my blog: http://paradisecommerce.com/canadian-taxes-gsthst/

  • Rita
    Rita
    June 21 2013, 01:42PM

    My only major concern is HOW am I supposed to ‘remit’ the taxes I collect? Am I going to have to submit 50 different payments per month or send it all in to ONE tax collecting entity with a spreadsheet broken down to how much tax goes to which states? THAT is the question I have… can any answer it?

  • Jack in TN
    Jack in TN
    June 24 2013, 03:55PM

    I contacted my US Senators and Representative, and only got back some pablum about them being ‘FOR’ this oppressive tax grab.

    I like these folks, but I will NOT be voting for them. They are abusing their power. If we all do this, then we can elect folks that do listen.

    Remember:

    “There are four boxes to be used in defense of liberty:
    soap, ballot, jury, and ammo. Please use in that order.”
    -Ed Howdershelt (Author)

  • Vik
    Vik
    July 05 2013, 04:42PM

    Hi Mark,

    I believe ecommerce sales taxation becomes much more complicated when you’re a Canada-based business.
    What are the best current practises for Canadian e-businesses that sell tangible goods to out-of-province, US, and international customers?

    Thanks
    Vik

  • Kevin
    Kevin
    July 11 2013, 03:29AM

    I live in Illinois, and I don’t know about other states so I can’t comment about them directly, but I assume it may be similar in some other states.

    In Illinois, the Sales Tax is what is referred to as “Retailers Occupation Tax” (or “ROT” (no pun)). The propose of the tax was to recover the cost of added city/county/state services that are provided to retailers more so than other types of (non retailer) businesses.

    The tax is assesed against the retailer (not the purchaser) but, a provision was added allowing retailers to (optionally) pass the tax on by adding the tax on to the purchase price at the time of sale. In any case, it is the retailer’s responsibility to pay the tax.

    That being the situation in Illinois, how does Illinois (and I assume at least some other states) feel they are entitled to collect the tax for any out of state sale, where they have no such government services burden to recover?

    For that matter, in Illinois, it doesn’t seem reasonable that they collect sales tax from companies that only have offices, warehouses, etc., but no actual retail locations in Illinois.

    I’m curious about how this compares to other states.

  • Owen
    Owen
    July 25 2013, 07:23PM

    See Kane’s post above, because he or she is spot on.

    This is just another example of big business and government joining forces to do what is best for big business and politicians.

    This issue has nothing to do with fairness for small brick and mortar retailers. Internet sales is what has allowed small b&m’s to survive big box retailers.

    It’s disgusting that an issue can never be honestly discussed in this country and politicians and interested parties are always couching every legislative issue in a giant steaming pile of BS.

  • Gayle
    Gayle
    July 29 2013, 03:27AM

    Really, how much harder do we really need to make our lives.

  • Jan
    Jan
    August 18 2013, 07:53PM

    You know eventually there will be a tax on internet sales. It is just inevitable!
    What about states like Alaska where there are no sales taxes. Some of you say the internet has helped brick and mortar stores, I am assuming you don’t have a store, just internet. I have a brick and mortar store and my business model is not broken, I just saw my sales cut in half this year. I still have customers but they only come to me for my professional opinion and then tell me they can buy online for a lot less with no taxes and freight free! If the tax burden falls on companies of 1+million a year, it really would give smaller internet sites a better chance. But like everything else there will be a loop hole for the big boys. I say if a (hypothetical ) 3% FEDERAL tax was collected from internet sales that would put appropriate burdens on everyone fairly.

  • Joseph Schufle
    Joseph Schufle
    May 15 2014, 06:29PM

    I can’t help but wonder who is already set up for the contract to program and deliver that “tax software”. A sweetheart deal for someone! Anytime a law requiring some specific technology is passed, someone gets rich. Example the law requiring “Choking Victim” posters displayed prominently on the walls of food establishments (I’m looking at one as I type). There was a printer with advanced knowledge of the bill, and the day it passed, he already had ads across the country offering laminated, OSHA compliant posters. Bricks and mortar businesses should be figuring out how to leverage the internet rather than shackle it. Just because they have let laws be passed (or remain in effect) that make them uncompensated collection agents for the government is not a valid excuse. Will this now also apply across the board to mail order? To distant learning? The list goes on and on. How many thousand-aires and millionaires has the internet produced since it became available to entrepreneurs (don’t forget it’s was originally designed to preserve military communications in the event of thermo-nuclear war and available only to companies and schools involved in military research). It is still a comparatively young technology and everyday there are new threats to it’s integrity. what we take for granted can very quickly change, as users in Russia, Turkey, China, Iran etc. have learned, and we are seeing from the Snowden revelations. Foe anyone under 30, the internet has been an integral part of life, like phone service, or TV, fresh running water as long as they can remember. But all of those can disappear without our constant vigilance. Complacency is the real enemy.

  • Sarge
    Sarge
    October 03 2014, 12:21AM

    This is called big bang short fuse as new technology take over the tradition way of doing business. There many disruptive models the classic example is live music was replaced by large disc then castes then CD then DVD and now MP3 players and cloud. similarly to Commerce which is replaced by eCommerce sites such as Amazon, ebay and shopfy. However there are other new sites that are gaining momentom including EcommerceLocal.com ecommercelocal.com.au and ecommerceLocal.co.uk

    I personally believe that although there are taxes applied to eCommerce website it will not effect the behavior of people from buying from eCommerce sites.

  • Omar
    Omar
    October 14 2014, 04:57PM

    Against. We are already taxed in so many ways our problem is not the lack of tax revenue. Our problem is how the revenue is used. That’s the real problem.

  • Paul F
    Paul F
    November 02 2014, 02:51PM

    Two issues – first is the reality that the “brick and mortar” involved that favor this are the BestBuy’s of the world, not the mom and pop local store.

    I bet every ecommerce operation would gladly collect sales tax in exchange for the credit line and discount structure offered to these “brick and mortar” operations. These companies already have HUGE advantages over 99% of ecommerce operations.

    Truth is this is the worst of government – big business and big government both benefitting, at the cost of 1 million or more small business owners. The small business owner will need a new strategy, will spend more time working for the government for free, while the brick and mortar costs are unaffected.

  • David Paul
    David Paul
    November 04 2014, 03:52PM

    It’s more common for someone to go online to get expertise help, reviews, videos and other info and then buy the item in a store where they can have it same day.
    Marketplace Fairness is not a fight between ‘Main St’ and ‘eMain St’ it is a fight between Walmart (mega stores) and everyone else who can’t afford to comply to this bill.
    After it gets passed against eMain St, expected it to hit Main St. Mark my words.

  • DLH
    DLH
    November 17 2014, 04:39PM

    My letter to Speaker of the House, John Boehner
    To: Speaker John Boehner
    Subject: Sales Tax collection from the Chinese
    Thank you, Speaker Boehner, for stopping the job killing Marketplace Fairness Act. Internet sales tax is a job killer and economic drag in many ways that some Congressmen, including ours, have not considered. Taking an extra 8-10% out of the pockets of struggling everyday Americans would decrease demand and slow our economy when it desperately needs a boost. Of course the rich probably will not notice. I doubt that Warren Buffet does much shopping on the internet.
    Many, many small internet businesses, like ours, would be devastated by the 8-10% cost increase compared to Walmart, Target, Amazon and shippers from foreign countries. The blizzard of compliance, reporting and audit issues from every City, County and State would not be easy and inexpensive to handle like many seem to think. The result would be jobs lost and doors closed. Any business that the small local brick-and -mortar stores would get would be miniscule. The bulk of the business would go to the aforementioned giant companies that could soak it up in their automated systems without even hiring new employees. I assure you that the big retailers are not donating to the effort to tax internet sales so the small local retailer can get more business!
    Finally, how do the proponents of the internet sales tax propose to force the Chinese or sellers from other countries to collect sales tax and send it to every City, County and State in America? That will not happen. Internet sales from China to the USA are growing daily because of lower costs and their subsidized shipping. Now, some Congressmen want to give them another 8-10% cost advantage by charging sales tax on internet sales to consumers who buy from American companies with American workers. The Chinese company, Alibaba, is bigger than Amazon and Ebay combined and they have long, growing tentacles into internet sales in the USA. Thousands of other Chinese companies are finding it easy and profitable to sell directly to the American consumer. They do not need more help.
    Thanks again for stopping the ridiculous legislation I like to call the “BBB” (Big Box Bonanza). If this Act passes the giant retailers will win and the small internet sellers and their employees will lose. But the big winners will be the Chinese and the big losers, once again, will be the American consumer. Please impress on all House members how important this is.

Leave a comment ...

Start your free 14-day trial of Shopify