What the Marketplace Fairness Act Means for Retailers

As of May 2013, the Marketplace Fairness Act had yet to get through the House of Representatives, but it had already been passed by the Senate. This means online retailers are one step closer to having to pay sales tax regardless of where they operate. If this is approved, it will have a significant impact on the retail industry. If you do any type of work in the e-commerce field, you must understand the potential implications of the Marketplace Fairness Act.

In 1992, the US Supreme Court ruled that an Internet retailer is not required to collect local tax if the company does not have a physical location in the town, city, or state of the customer. If a customer lives in Philadelphia, for example, the retailer would not have to collect sales tax if it does not have a presence in either Philadelphia or the state of Pennsylvania. This was a real boon for the retail industry because it meant some online retailers could attract customers looking to save money on their purchases. A Philadelphia customer would save up to $8 on a $100 order because Pennsylvania has a state tax of 6 percent and Philadelphia has a 2 percent local tax, bringing the total sales tax rate to 8 percent.

Proponents of the Marketplace Fairness Act believe that the previous ruling gave online retailers an unfair advantage, as traditional retail shops must charge sales tax on all purchases made by walk-in customers. The exceptions are for businesses located in Delaware, Alaska, New Hampshire, Oregon, and Montana because they do not have state sales taxes. Opponents of the act believe that it will unfairly impact small retailers that do business online. Retail giants such as Amazon have the technology and financial resources to keep track of the different tax rates levied by different states, but it will be difficult for small-business owners to maintain records of this information.

Opponents of the Marketplace Fairness Act also believe it will bog business owners down with compliance audits. The bill contains language that allows any state to order an audit against any online retailer. If a state orders an audit, the burden is on the retailer to fill out compliance forms that will help prove that it is in compliance with the Marketplace Fairness Act. It will cost business owners time and money to fill out the paperwork and meet state-imposed deadlines, especially if they have to hire tax specialists or attorneys to represent them. David John Marotta of Forbes.com suggests that the costs of compliance could even outweigh the amount of revenue collected by implementing this act.

Whether the Senate will pass the Marketplace Fairness Act remains to be seen, but you must be aware of the potential implications. If you feel the act will have a negative impact on your business, write to your state representative and outline your concerns. Doing so does not guarantee that the act will be defeated in the House of Representatives, but taking action now is better than doing nothing and suffering the consequences if the Marketplace Fairness Act is implemented.

(Photo courtesy of nokhoog_buchachon / freedigitalphotos.net)