The days of tax-free online shopping in the States could finally be numbered.
By now, you have probably already heard all about the Marketplace Fairness Act (MFA), also known as the “Internet Sales Tax.” It’s a new legislation 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 requires ecommerce retailers to collect state tax in qualifying states, regardless of the retailer’s physical location.
Since before the dawn of online shopping, the basic rule was that as long as a retailer didn’t have a physical presence in the state where the consumer was shopping, the company wouldn’t have to collect a sales tax. Technically, shoppers are supposed to track these purchases and then pay the taxes owed in their annual tax filings. (Raise your hand if you even realised this was required.) In reality, not many do: In California, only 1.4 percent of online transactions included the required sales tax.
The MFA would reportedly help state governments collect $11 billion in lost tax revenue. States are looking to the growing ecommerce industry, expected to top $400 billion this year, to help fill their depleted coffers. For merchants, that fact is irrelevant; the bigger issue is that the law makes shopping online more expensive for consumers and complex for retailers.
So what does the Marketplace Fairness Act mean for you?
First of all, if your business does less than $1 million in sales a year, you can relax. You’ll be exempt from the new law.
Unfortunately for everyone else, you can expect ecommerce procedures to get far more convoluted.
For brick-and-mortar retailers, collecting tax is simple, they just need to add the tax to the customer’s bill. Unfortunately it is not this easy when it comes to ecommerce. If the bill passes, you will need to begin collecting sales taxes from everyone, except those in the five states that do not have a sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon). This means you will need to file a tax return in all 46 states you collect tax from. That’s 46 tax rates to keep track of.
Tax rules would need to be considered for more than 9,600 different tax-collecting jurisdictions, if including state and local governments. Since each government has their own unique rates and rules it will be quite a difficult task to manage. For example in one city a chocolate bar may be considered a taxable good, but in another jurisdiction it could be classified as food, and therefore not subject to sales tax.
And then what happens if the customer’s billing address is in one state while the shipping address is in another?
The bill says tax is to be collected based on the shipping address, not the billing address of an order. This means purchases could be taxed based on where a gift-recipient lives rather than where the gift-giver is located, raising the question of whether this is a use tax or a sales tax.
Several questions still remain un-answered. For example, how do international ecommerce merchants selling to the States account for sales tax? How can online merchants make forecasts and sales projections, when their potential sales could come from anywhere?
If you would like more details on how the Marketplace Fairness Act could affect small-to-medium sized ecommerce merchants, I would recommend watching this short video clip from Multichannel Merchant.
Before we start panicking it’s still quite possible that the MFA might never see the light of day, and it’s still in the long process of being put into action. Though it has passed the Senate, it still must still pass the House before moving onto the White House.
Even though it’s not law yet, it’s important to pay attention to the bill. Staying informed now could make things much less painful later when and if it does pass.
What are your thoughts on the Marketplace Fairness Act 2013 and what strategies do you plan to implement for your online store should it pass?