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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. 

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