The Marketplace Fairness Act: How it will affect Retailers and Consumers (Part II)

In Part I of this series, we looked at reasons why major retailers and many lawmakers in both parties are in favor of the Marketplace Fairness Act. Now we will examine some of the opposing arguments, as well as the implications of this law on businesses and consumers.

Reasons to Oppose the Marketplace Fairness Act: The main opposition to this law comes from EBay and many smaller retailers who do most of their business online. They contend that the brick and mortar stores already have a built-in advantage because consumers are more likely to buy from them rather than an online store out of state. They argue that to be competitive (and in many cases to stay in business), they must retain the advantage of not having to collect sales tax. In addition, the small retailers contend that it is far too burdensome to force them to know and comply with taxes in hundreds of different jurisdictions.

To help mollify critics of the bill, a provision has been added exempting small businesses with annual U.S. gross receipts under $1 million. This would exempt many small entrepreneurs with online stores from having to comply with this law. Those opposing the bill are lobbying lawmakers to (at the very least) raise this exemption to $10 million.

How this Law Affects Consumers: For consumers, the implications of the Marketplace Fairness Act are pretty straightforward; they will now be paying state sales tax on most items they buy over the Internet. The only exception is if the product is purchased from a small online retailer that qualifies for an exemption. This of course will increase the tax burden for most consumers and bring in additional revenue to state treasuries.

It should be noted that consumers are already required to pay sales taxes to their state of residence on products they purchase out of state, though most are unaware and/or choose not to comply with this requirement. So theoretically, this new law would only be adding an enforcement mechanism to compel consumers to comply with a requirement that already exists.

How this Law Affects Retailers: As the bill stands right now, if you are a small business that does not have gross sales of over $1 million, nothing will change. However, for those with over $1 million in sales, you will be required to collect all state and local sales and use taxes for the buyer’s state of residence. Depending on the size of your business, this type of requirement may be quite burdensome and necessitate additional staff to help you stay in compliance.

The Marketplace Fairness Act may or may not become law in 2014. Keep a close eye as Congress debates it and makes amendments. If you are uncertain if this law will affect your business and/or how you will stay in compliance with it, speak with a tax expert that can help you prepare for it if/when this law is implemented.

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