The Marketplace Fairness Act – Boon or deficit to economic growth?

Republicans and Democrats each have their own position on the Marketplace Fairness Act. Who is right?

Although the Marketplace Fairness Act initially represented a bipartisan effort to fairly tax online purchases, it has taken a bit of bludgeoning from conservative media sources, such as Forbes and the Wall Street Journal since it left the Senate in May, which is surprising, considering the resounding majority in favor (69-27).

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The bill has not been revoked entirely, but we have not heard about any real progress since then.

What is the issue?

Everyone agrees that Internet sales should be taxed. In all fairness, companies relying on E-commerce for their sales should not be given a 5-10% edge on their brick & mortar competition. And that is precisely the edge E-commerce currently has.

Officially, the onus is on the purchaser to remit sales tax on out-of-state transactions. Companies tend to fulfill this requirement already, but most consumers do not even know they are in violation of the law. They are not punished because state governments do not have the wherewithal to track down online purchases. The Marketplace Fairness Act would solve the problem.

The Act would authorize states to force online and catalog retailers to collect sales tax at the time of the transaction, which would impose the same system as the one used by storefronts that give you a bag. That sounds fair for all, but the practical application could lead to problems on the electronic side.

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Currently, every state has its own sales tax code – replete with guidelines, percentages, and untaxable goods. So forcing retailers to adjust their sales tax for every individual state is prohibitively complex.

To hop over this hurdle, the Act provides states a choice. Each state either:

1. Signs onto the Streamlined Sales and Use Tax Agreement (SSUTA) and simplify their tax code (24 states are already members); or
2. Follows a set of guidelines for simplifying their tax code and provide free software/services to help retailers stay compliant on their sales tax obligation.

Conservative media sources have voiced concerns over the effect of the second provision. They argue that the Act could put many smaller enterprises out of business anyway, due to expensive costs of integrating the myriad of tax applications. Even though the software itself would be free, some professionals estimate $30k-$200k in upfront costs.

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The law does exempt retailers earning less than $1 million in annual revenues, but as the argument goes, many online retailers who have low margins would be unable to adapt to the steep up-front costs. They would be forced out of business. On top of that, the upfront costs associated with topping the $1 million revenue mark might keep digital storefront owners from growing their businesses, which would curtail the country’s economic growth.  

These are murky waters, but as an American citizen who clearly cares about taxes (you are reading this, aren’t you?), you have the right to weigh the costs/benefits and make your own decision.

 

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