Back in early May 2013, the US Senate voted to pass the Marketplace Fairness Act, inching it closer to its implementation and enforcement. The bill aims to level the playing field between ecommerce fronts and brick and mortar stores by making purchases from both taxable. Brick and mortar stores already collect sales tax based on local tax code rates and pretty much just serve the immediate community around them. On the other hand, ecommerce sites work across the entire country and currently just collect tax for in-state customers (in-state defined as an ecommerce store having a physical address in the same state). If the act is passed, state governments should see over $10 billion in tax revenue from online sales. The bill is still technically up in the air, as the House of Representatives hasn’t voted on it and President Barrack Obama has yet to sign it into law, but he has shown strong support for it. Here’s what you need to know about this piece of legislation.
A Brief History of Taxation and Online Sales
Back in 1992, the Supreme Court case Quill Corp. v. North Dakota resulted in a ruling that required a business to have a physical presence in a state for the state to collect taxes from it. Quill Corporation, headquartered in Illinois, is an office supply retailer that offered North Dakota residents a service that allowed them to purchase items remotely from the Quill Corporation store. North Dakota wanted to tax all purchases made through this, but the Supreme Court sided with the business and struck down the state’s attempt.
As it stands, the only way for states to collect taxes on online purchases is if customers report purchases in their tax filings. However, when was the last time you did this? Did you even know that you had this option? As you can surmise, not many customers list their purchases during tax season, causing the big loss in tax revenue for state governments. The Marketplace Fairness Act aims to shift the burden of tax reporting onto ecommerce stores and was first drafted and introduced to Congress in 2011.
What the Act Does
The Marketplace Fairness Act is mostly unchanged from its 2011 version and requires ecommerce stores that earn above a certain amount of money in sales to collect taxes from remote customers who live in Streamline Sales Tax states (more on that later). The act theoretically allows more local brick and mortar stores to be more competitive with pricing since sales tax will be mandatory for online and offline orders in certain states. Obviously, consumers will have to pay more when they shop online. From a 2013 study conducted by Mashable during May, about 44 percent of online shoppers said that they will purchase less from ecommerce outlets if the bill goes live. So once you receive an order affected by the Marketplace Fairness Act, you will need to look up the customer’s residential tax code and apply it to the final total.
Once the bill is fully signed and implemented, you will be required to collect out of state taxes starting on the first day of the calendar quarter that is at least 180 after the enactment.
Does Your Store Qualify for New Taxes?
One of the major misconceptions about the new bill is that all ecommerce stores will be affected, even the small ones that are just trying to get off the ground. Ecommerce fronts that make less than one million dollars in remote sales annually are exempt from out of state taxes. If you do make more than one million dollars from remote sales, not every customer you serve will be subject to new taxes. In order for a state to collect a remote tax through the bill, the state needs to be a full Streamline Sales Tax State Member. Member states employ a set of laws that simplifies tax collection. A list of these 22 states can be found here. Additionally, Ohio and Tennessee qualify as Associate Members, meaning that they have started transitioning into the Streamline Sales Tax Project. Within a year, they will become full members. Not all states are required to sign up for the Streamline Sales Tax State Project, but with the projected potential revenue numbers for online taxes, it’s really tempting to dive right in.
For online sales in states where you currently hold property, nothing will change with regards to taxation. This is one of the major reasons why big companies such as Wal-Mart and Amazon support the act. They already hold property in most of the states, so business would continue as usual for them. Meanwhile, their smaller competitors will have to dive headfirst into new, unfamiliar territory.
What You Need to Do if the Act Passes into Law
From a strategic point of view, the Marketplace Fairness Act will force your ecommerce site to be a lot more careful with online pricing. After implementation and the ensuing grace period, you’re going to have to suddenly compete with dozens of brick and mortar stores. You need to stay competitive and profitable, meaning that you will need to adjust your prices to compensate for the added tax. You also have the option of designing some slick promotions and campaigns to let your loyal consumers know that everything is going to be ok.
Then there’s also the problem of managing tax rates for (potentially) every American state. When each district has its own rate, things can get out of control pretty fast since there are thousands of different rates out there. A brick and mortar store has it a lot easier, as it just has to deal with its single local tax rate. To prevent a lot of potential confusion, all Streamline Sales Tax State Members must offer tax software that lets ecommerce vendors easily work with all the individual tax rates. These pieces of software are free and can integrate with a number of popular ecommerce platforms. Currently, six products are offered for members. You can view a list of them here and see each one’s features so that you can get a feel for which one would work best for you. On the (slightly) brighter side of things, you don’t need to worry about customers from Alaska, Delaware, Oregon, New Hampshire, and Montana since these five states require no sales tax at all.
There’s been a lot of speculation and hype with regards to the Marketplace Fairness Act since the bill will undoubtedly change the way ecommerce stores are run. You will need to deal with rising marketplace costs and a large selection of tax codes for out of state customers. Hopefully, the government can ease the transition into this new model through the Streamline Sales Tax Project and the free tax code calculation software that will be offered.
Keep in mind that this act still is a ways off. Both the House and President Obama need to approve on the bill, though both seemingly support its implementation. In the meantime, it helps to stay informed of the bill’s status. That way, you can plan ahead when the act gains traction and not be blindsided by any substantial developments. Don’t wait until the last minute to start hatching a strategy, as your opponents may already be prepared for the new ecommerce landscape.