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The Shipwire Blog/The Marketplace Fairness Act: the new online sales tax and you

The Marketplace Fairness Act: the new online sales tax and you

online-sales-tax-marketplace-fairness-actThe Marketplace Fairness Act (MFA), which has just been approved by the U.S. Senate, is about to significantly change the landscape for businesses selling online.

In Part One of this three part series, we will explore the basics of the MFA, why it passed the Senate, and who supports this new law.

What is the MFA?
Previously, online retailers did not collect online sales tax from customers where the seller had no physical operation (also known as a “Point of Presence” and by the legal term “Nexus”). The new law, however, will require sellers to collect a tax on purchases made by the 45 states who charge a sales tax on their residents, even if the retailer has no presence in that state. Thus, the MFA is federal legislation that will allow states to tax internet sales as they do state sales.

The MFA will allow an exemption for companies who make less than $1M in annual sales. However, this is hardly an exemption considering that “small business” revenues hover in the range of $30M annually for e-commerce businesses, according to the Small Business Administration.

As an added caveat, a sales tax will be collected from companies selling digital goods in 24 states, but virtual taxation will not end there. Forecasters also predict the tax cloud will loom over for online gamers as well. Virtual earnings that are paid to gamers will potentially be taxed, and the IRS will require gaming companies to track the earnings of its users.

Why did the MFA law pass the Senate?
According to the National Governors Association, the MFA is estimated to bring in an additional combined total of $23 billion in revenue for state governments. In uncertain economic times, where state and local governments are looking for any new source of revenue, internet sales look like a juicy target.

Online retailers will also surrender a competitive edge to traditional businesses that don’t sell online. Stephen Schatz, a spokesman for the National Retail Federation, has stated that this new law will help level the playing field for brick-and-mortar businesses that already collect a sales tax. Proponents agree that it will be more “fair” with this new system.

Who will benefit and who will lose?
Major retailers such as Wal-Mart, Sears, and Target all support the MFA as they already have a substantial physical presence throughout the country, and thus already collect sales tax. Even has jumped on the MFA bandwagon as it continues to build new warehouses in multiple states.

But is there a hidden agenda behind these big players? In a competitive retailing environment, the largest sellers may be happy knowing that smaller companies will have a much harder time dealing with an added complexity in the tax system.

Thus, opponents of the bill state that the MFA will adversely affect small businesses. One major opponent is internet giant eBay. John Donahoe, President and CEO of eBay, has lobbied to increase the small business selling exemption to $10 million annually so online sellers will not have to bear the burden of collecting from the more than 9,600 state districts that charge a sales tax.

The counter argument being proposed by legislators is basically saying that the burden is lower than Mr. Donahoe states because tax software has gotten better and the MFA includes some carvouts for buying tax software. On the other hand, this doesn’t take into effect the time to process errors and audit risks, and the general stress to small sellers to comply.

Other small business supporters are well aware of the impact this will have on e-commerce and the way in which we sell online. Will “leveling the playing field” really be fair, and what will be the consequences for small businesses? Stay tuned for Part Two to find out.

Stay tuned for Part 2 of this three-part series on the MFA.

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