US Senate Gives States an Internet Tax Collector

The U.S. Senate on Monday voted 69-27 to pass the Marketplace Fairness Act, a measure that gives states the tools necessary to collect sales taxes from online retailers that do business in their states but don’t have a physical presence there.

The bill, lauded in some quarters and decried in others, is now heading to the House of Representatives, specifically the House Judiciary Committee. What its fate will be there is anyone’s guess.

While the measure had enough momentum to push it across the finish line in the Senate, it is not clear there are enough proponents in the House to overcome reservations many representatives have expressed.

Chief among the reasons some are hesitating: The Act has been portrayed as levying a new tax.

Not a New Tax

That is simply not true, Carl Richie, a tax associate principal with the accounting firm Kaufman Rossin & Co., told the E-Commerce Times.

There are a number of valid reasons to hesitate about this measure, but the idea that it is a new tax should not be among them, he said.

“It is new way to collect taxes that have been around for decades but this is not a new tax,” Richie insisted.

States have been among the chief advocates for this measure. For years they have watched in frustration as online commerce allowed residents to avoid paying state sales taxes on purchases. Lost state revenues are estimated to be many millions, perhaps billions, of dollars — money that became a significant issue in the Great Recession.

Other proponents of the Marketplace Fairness Act are brick-and-mortar retailers that feel they have been unfairly penalized by the tax advantage online retailers have been able to offer customers.

There is some evidence to suggest that the tax issue pushed some cost-conscious consumers to shop more online. Twenty-eight percent of respondents to an AlixPartners survey said if sales taxes were collected online, they would buy more in physical stores.

A Compliance Burden

E-tailers are among those that oppose the measure, with one notable exception. Although it fiercely resisted an online sales tax in the past, Amazon has come around to accepting, if not embracing, the concept. Other large e-commerce companies — especially companies with both brick-and-mortar and online sales operations — also support the Marketplace Fairness Act.

Smaller companies are against it, Richie said, because the act represents a huge new compliance burden.

The Senate version of the act exempts companies with less than US$1 million in annual revenue, but that is not a lot of revenue, Richie noted.

“Smaller companies with, say $5 million in revenues, will find it very burdensome to comply with this measure,” he observed.

Sales tax can be a very complex calculation.

“At the microscopic level, there are a number of differences between states,” Richie pointed out.

“People make the case that having this measure will simplify things,” he continued, “and from the perspective that at least retailers will know they have to collect the tax, it does simplify things.”

However, it introduces a whole new world of complexity for retailers as well.

“If it passes, this law will put enormous pressure on small to medium-sized companies,” Jim Emerich, CFO of Avangate, told the E-Commerce Times.

“For starters, [each company] will need to create a sales tax matrix of all the products and services it sells, the states to which it sells into, and determine which products are taxable and where,” he explained.

“Net net, this bill will add more costs and drain more resource from businesses that should be focusing on their products and services,” said Emerich, “unless they are paying close attention to their back-end platform provider.”