Have you ever noticed that buying things online is just a little cheaper? That’s because many online stores aren’t required to collect sales tax for individual states. Unless the store has a physical presence, it doesn’t technically reside in any one state, which means it’s exempt from local tax laws. The Marketplace Fairness Act of 2013, which recently made it though the Senate and is currently being discussed by the House of Representatives, intends to change all that. For online retailers, this could mean a big change in the way they do business.
What is the Marketplace Fairness Act?
The Marketplace Fairness Act essentially forces all online retailers to collect sales tax for the state they sell to. This means that if you sell an item to someone in New York, you have to factor in the sales tax for that state, even if you ship from Montana.
Technically, you’ve always had to pay sales tax on items bought online, even if the company doesn’t factor it in. You’re required to report untaxed purchases to the IRS when you file your yearly taxes, and pay any extra sales tax that you owe. The problem is that this is so difficult to enforce; who’s going to remember to report the 20 cents of sales tax they should have paid for a pair of headphones they ordered back in May of last year?
With the Marketplace Fairness Act, you won’t be required to report those purchases on your taxes anymore; that’s because the online stores will be collecting the tax for you.
Why So Many People Love It
Every state that charges sales tax pretty much loves this bill; after all, they finally get a cut of that untapped revenue. But what about the businesses who will be affected by this bill?
The Marketplace Fairness Act gets its name from an attempt to level the playing field. Many local businesses, who sell their items in person, can’t compete with tax-free online retailers. In an age where more and more shopping is moving online, local stores are struggling to get by; this act will force online businesses to compete “fairly”.
Why Small Businesses Don’t
On the surface, collecting sales tax doesn’t seem like a bad thing, especially since the money comes from the consumers. The problem comes from the sheer number of states that you’ll have to collect this tax for. Online retailers will have to sort through tax codes for 45 different states, figure out how to calculate that sales tax on their site, and report (and pay) the tax each year. If they mess up, they’ll be slapped with a fine.
Large retailers like Amazon are perfectly fine with this; they have an extensive legal and accounting department that can figure out those tax codes, no sweat. But small online retailers just don’t have the resources to deal with this. If you’re barely able to pay your employees, can you afford an expensive accountant each year?
For people who sell off of their own sites, the Marketplace Fairness Act means that they’ll need to hire a web developer. The site has to be able to automatically calculate the appropriate sales tax for each purpose, and keep a log of which purchases were made each state. There’s no escape for retailers selling through sites like eBay or Etsy, either; those retailers are just as liable for taxes.
Becoming an online retailer is already a difficult process. This bill could prevent start-ups from ever getting off the ground; the sheer amount of paperwork will likely be enough to discourage many people from even trying to start their own company.
Granted, the act isn’t all bad – there’s been talk of an exception for small business who make less than $1,000,000 in revenue each year, and states will be required to provide online tools to help calculate sales tax. But in a struggling economy, is it really a good idea to make starting a business even harder?
What Do You Think?
This is a seriously two-sided argument, and we’d love to know your thoughts. Is it time for online businesses to pay taxes just like everyone else, or is this an unfair damper on already struggling entrepreneurs?
You can state your opinion on the bill through PopVox, and send a message to your state representatives, regardless of which side you support. There’s also a running petition on Change.org to stop the bill from passing the House of Representatives.
So what do you think?
1 thought on “The Marketplace Fairness Act and Your Business”
I don’t mind this if the exception for small businesses is indeed included in the bill. I would imagine anyone making $1,000,000 per year would be able to afford some kind of help in this department, especially if the states are required to provide an online service to help.
What I am not sure of is how the states can all get on the same page in regards to their tax codes. For instance, I think some states have different designations on what gets charged sales tax vs. others. Definitely not an expert, but it seems there is more work to do to define how all of this will work.
I do like the idea of increasing the chances that we get more brick & morter stores locally, but that could be because I live in Aurora and we have more empty strip malls than most. We’ll see what happens.