The Marketplace Fairness Act is rapidly approaching a final vote (expected May 6th). Although it looks like the Act will pass, there is quite a bit of debate in the retail industry regarding whether or not the bill really is fair. The Act requires online and catalog retailers with revenues above $1M to collect tax on transactions for tangible goods regardless of where they are located. To help retailers, the bill also requires that states simplify their state tax laws before they can collect. They can do this in two ways:
1. Adopt the Streamlined Sale and Use Tax Agreement (SSUTA). Twenty-four states already use this model.
2. Meet the five simplification mandates listed in the bill. The mandates include:
I. Notification of rate changes
II. Appointment of a single state organization to handle tax procedure
III. A uniform tax base across the state
IV. Destination sourcing
V. Free software for retailers
The intent is that these requirements will ease the burden on online retailers to collect tax across multiple states.
Sponsored by Sen. Mike Enzi, a conservative republican from Wyoming, the bill has received support from President Obama, Amazon.com, brick-and-mortar retailers including Best Buy Co., the National Retail Federation, the National Conference of State Legislatures and hundreds of other federal, state and local trade associations and business. However there has also been major push back from online merchants, led by eBay, and anti-tax advocates such as Americans for Tax Reform and the Heritage Foundation.
The argument for:
Supporters of the Marketplace Fairness Act argue that brick-and-mortar businesses have already dealt with a 5-10% price disadvantage for years because online retailers were not required to collect tax and this bill closes that price gap.
The leveling of the playing field also helps states collect taxes that have been due to them but never paid. Technically, consumers are supposed to report unpaid taxes on online purchases but almost no one ever actually does. This bill gives the government a way to enforce those established taxes. The National Conference of State Legislatures estimates that states lost $23B in uncollected taxes on out-of-state sales.
The argument against:
Online retailers feel that the so-called internet tax places undue burden and cost on online retailers. Brick-and-mortar stores only charge state tax for the state in which they operate, no matter where the customer making the purchase is from. The Supreme Court has supported this by stating that merchants must have substantial nexus with a state (i.e. offices, warehouse or sales force) in order to collect taxes on its behalf. But the Marketplace Fairness Act forces online retailers to support tax collection for multiple states, even where they do not receive the benefits of the taxes collected.
Furthermore, the cost of supporting up to 9,600 tax codes is daunting for online retailers of almost any size, but especially for the small to mid-sized ones.
Although there are free tax services available to support these transactions, maintaining them in companies where IT departments typically consist of just a few individuals could be prohibitive. Executives from Overstock.com warned against the bill to the Wall Street Journal last year stating that it took their IT team over five months and $1.3M to properly calculate tax for just one additional state.
Despite their attempts to thwart its passage, opponents seem to recognize that the bill has support and are now arguing to increase the threshold to exempt small businesses from $1M to $10M (or 50 employees).
Impact to online sales:
If the bill passes, experts do not predict a major shift in the way Americans buy online. People are used to paying sales tax. So although there will likely be some complaints, its unlikely that it will affect actual sales. Although some hope the tax will reduce showrooming (when consumers go to stores to find products they want then buy them online tax-free), this behavior is not expected to change dramatically as selection and convenience still rank one and two as to why people shop online. The one area where online sales are expected to drop is on big ticket items. Consumers like to buy these items online to avoid paying a large tax.
Impact to online retailers:
To the online retailer, supporting multiple tax codes is going to be a shift in both business process and technology. Tax services are available from six SSUTA Certified Service Providers (CSP). The twenty-four SSUTA states subsidize this service so that retailers can use the service for free.
The CSPs are outsourced tax services that integrate into retailers eCommerce and financial systems through an API to manage:
- Sales tax calculation
- Sales tax return filing
- Report generation by state
- Monitoring of tax changes and updates
- Tax exemption management
When buyers make a purchase online, a request for tax information is sent to the tax service, which sends back the tax amount based on the origin, destination and class of goods. The service keeps a record of the transaction for reporting purposes but not individual customer information.
Although the free services can calculate tax for any jurisdiction, online retailers will still need to integrate that order and tax information into point of sale (POS) or enterprise resource planning (ERP) systems for tax reporting and returns from states that are not part of the SSUTA.
At this point, the climate surrounding the Marketplace Fairness Act looks favorable, but passage would mark the beginning of a new challenge for online retailers. Although online retailers are being asked to believe that free tax services will make it easy to calculate taxes for any buyer nationwide, anyone with technology experience knows that its never that simple. Online retailers need to prepare themselves for a long road ahead by partnering with a connected commerce expert who can help them integrate and manage this new requirement for their applications and processes. Without proper technology to support these efforts, companies run the risk of inaccurate filings, audits and court hearings which could be 2,000 miles way.
nChannel will continue to monitor the progression of this bill and its passage and look for ways to help customers manage their multi-channel environment to reduce complexity and maximize profitability.