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June 4, 2013

Marketplace Fairness Act: 9,000 Reasons for Online Businesses to Protest Proposed Law

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The once simple world of online business has grown increasingly complex — and expensive — for small business owners.   The rapidly expanding mobile audience — expected to reach 7.3 billion by 2014 — and the continued threat of changes in Google’s algorithm probably already has you wondering how much tighter your bottom line profits will get squeezed by factors beyond your control.

Now along comes the Marketplace Fairness Act, informally known as the Internet sales tax bill, to further complicate things for your business.

The controversial bill, passed by the Senate on May 13 and now up for consideration in the U.S. House of Representatives, reads simply on paper.  It’s just 11 pages long, compared to another tax measure before Congress that totals 568 pages. And the provisions are easy to understand:

Simple Law, Complex Problems

Any online retailer with gross sales of more than $1 million annually would be required to collect sales tax from customers in 44 states.  Six states — Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — do not have a sales tax. States would have to provide the necessary software to calculate the tax.

That’s all there is to the proposed law, although it could change in the House.  But some not-to-simple ratifications to the legislation in its current form include:

• Internet retailers could be subject to audits by 9,600 separate taxing jurisdictions, according to an article in The Blaze. Because many cities impose taxes higher than those levied by their states, the number of taxes small business owners would have to collect is 192 times higher than the number of states in the union.

Just as Turbo Tax doesn’t eliminate income tax complexity, software won’t make it easier for online retailers to manage tax collection requirements, writes Andrew Moylan, senior fellow and outreach director at R Street Institute, where he is the organization’s lead voice on tax issues.

• Online shoppers may start conducting more of their business at brick and mortar businesses.  Some 44 percent of persons queried — and 75 percent of those aged 18 to 25 — said they would cut back on the their Internet shopping if the Marketplace Fairness Tax passed, according to a study sponsored by Endicia, an electronic postage software company, and reported by Mashable.

The bill, which proponents say will protect mom and pop stores, could cut sharply into already slim margins for small businesses that meet the $1-million threshold.  Based on average profit margins  of 2.1 percent for Amazon and companies in the specialty retail sector and 1.7 percent for eBay and other catalog and mail order retailers, an eCommerce business would have to find room in scant profits of $17,000 to $21,000 to comply with to comply with the Marketplace Fairness Act.

eCommerce Retailers Take Sides

Proponents of the Internet sales tax say the measure would level the playing field for brick and mortar companies that must comply with sales tax laws in their own cities and states.  Those opposed to the bill, including some conservative members of Congress and most owners of eCommerce sites, say the proposed law is unfair.

“It will be a nightmare for a merchant, a bookkeeping nightmare, says Mitch Gantman,  owner of Eyeglasses 123.  “Our cost of business will go up. I believe we will have to register with every state and county in the government.  Then we will need to know the tax percentage for each and send multiple checks to each of them.”

Gantman, who also owns a brick and mortar prescription eyeglasses business in New York, says the current system of collecting sales tax does give eCommerce companies an advantage over traditional businesses but that the proposed law goes too far in the other direction.

David Anderson, who has also worked in both online and offline settings — and on both sides of the Atlantic — is more blunt in his assessment:

“Fairness Tax my *ss!” says, Anderson, owner of David Anderson Wealth,  a consultancy business devoted to helping entrepreneurs and mom-and-pop operations thrive in today’s competitive marketplace.

“Of course the beauty of the act is that in principal it seems to be fair.  The reality is something different. It’s going to cost online businesses time and money to implement the sales tax across all 50 states and, once you have added in the out-of-state shipping costs, you are usually not far off the store price.  Now that advantage will disappear. And so will many businesses and jobs.”

eCommerce Merchants Already Burdened

The burden being placed on eCommerce sites is onerous,” agrees Jim Fitzpatrick, president of Moringa Source. “One of its underlying premises is that online retailers have an unfair advantage over brick and mortar stores. However, online retailers have many of the costs of brick and mortar stores and still have to offer additional services to customers to induce them to purchase, such as free shipping, large inventory commitments, eCommerce specialists, search engine optimization services, pay per click advertising, fulfillment services, server and website maintenance.”

Some E-tailers Support Internet Sales Tax

Abbie Sladick, owner of a Florida-based design and remodelling firm, says it would be a challenge to implement the sales tax requirements for her online business, AbbieJoan.com, “but it is just a part of business.”  She says brick and mortar business already enjoy and will “always have the advantage of giving instantaneous gratification, one-on-one customer service and community connections.”

So why does she support the Marketplace Fairness Act?

“I don’t love taxes,” she says, “but I certainly value education and social services.  They must be funded somehow.”

Internet businesses have the ability to reach customers all over the country and the world, something brick and mortar businesses cannot do, says Mia Kaplan, an artist who sells jewellery and other pieces of artwork on her website.

She says the proposed law is fair and unlikely to harm her business.  Although people who shop at her online store are sensitive to price, they “come to the online stores to find to find things they would not otherwise find locally, or easily.”  If people have to pay sales tax to obtain such items, they will, Kaplan says.

Time to Speak Up

New York Times reporter Jonathan Weisman  reports that the Marketplace Fairness Act has 65 co-sponsors, including traditionally anti-tax Republicans.  He says the bill “faces an uphill climb in the House, but not a steep one.”

If you oppose the Marketplace Fairness Act, write to your representative in Congress — or all 435 of them — and share your thoughts in the comments section here.

Would the Marketplace Fairness Act level the playing field between brick and mortar and eCommerce businesses or unfairly burden Internet retailers?


Katherine Brooker is a New York Times-acclaimed writer whose work has appeared in bestselling books, national publications and professional journals.

53 Responses to “Marketplace Fairness Act: 9,000 Reasons for Online Businesses to Protest Proposed Law

    avatar Charlotte Hannaford says:

    This is great news for Amazon — more retailers will sell their products through them to avoid the hassle of trying to figure out the (*& tax. It’s no wonder Amazon supports the law. What I can’t figure out is why eBay doesn’t. It will be good for them too. Just bad for the small business owner who.

    avatar Katherine says:

    I understand your frustration, Charlotte. There will certainly be companies that will provide software to make the hassle of computing taxes less cumbersome — and maybe cheaper than selling through Amazon and eBay. This is something you would want to discuss with your financial adviser.

    avatar Ivy Clavelle says:

    We shouldn’t be required to collect taxes for states that provide us no benefits. If a state can’t figure out how to get its own citizens to pay taxes, why should they put the burden on us? The states have auditors on payroll who have nothing but time to send out notices if they THINK we underpaid. Where do we find the staff to answer the complaints? UNFAIR!!!

    avatar Katherine Brooker says:

    The “taxation without representation” argument is being put forward by a lot of small business owners. Thanks for sharing your thoughts.

    avatar Morris D says:

    I’ve heard A LOT of dumb ideas come out of Washington. This is the worst ever for small business owners. Small business owners add to the economy. This law could put us out of business — and on the public dole. Where’s the logic in that?

    This helps small businesses in a roundabout way. If a large percentage of local citizens within a state are purchasing online from out of state companies (that can sell product for less and pay no tax) then a significant amount of tax dollars are not being generated in state. The state now loses tax dollars (that can be used to subsidize small business programs and grants) and the local economy is also not getting the stimulation benefits of local buying. By trying to level the playing field, state level economies can now compete even with higher tax rates.

    avatar Katherine Brooker says:

    I can’t argue with your “dumb ideas” comment! I urge you to contact your Congressman. The bill is getting unusual support from Republicans because it’s technically not a tax — it would force online retailers to collect taxes buyers should already be paying — so could gain traction unless people like you make your voices heard.

    avatar Jake Weatherly says:

    While retailers await a final decision on the Marketplace Fairness Act, which could really impact their bottom lines, very few are talking about what this could mean for consumers. If enacted, increased costs at go-to online shopping sites could significantly impact Internet buying behavior. And underneath that change, these ecommerce sites will be scrambling to keep their customer base by providing offers, deals and discounts to balance the effects of added taxes.
    Jake Weatherly, CEO of SheerID

    “It’s not just the online retail sites that will feel the burden of this new law. Consumers are constantly watching every penny they spend, and they will continue to search out the best prices and deals to ensure maximum savings. The Marketplace Fairness Act will force retailers to start thinking about new ways to market to these fiscally responsible shoppers.”

    “With prices set to increase at many popular ecommerce sites, retailers need to start thinking about how the Marketplace Fairness Act is going to impact shoppers who prefer online shopping to avoid taxes. Targeting consumers with new discounts and special offers is the best solution for businesses that need to cope with new tax regulations while maintaining their customer base.”

    avatar Katherine Brooker says:

    Thanks, Jake, for your insight. When I shop on eBay, I look for sellers who reside outside California to avoid the sales tax — unless the product is something I need right away or can’t find elsewhere. So, if small businesses appeal to their customers’ needs for speed, easier customer service, unique quality or some other factor, they can soften the impact of the MFA, should it pass. Customers do not shop solely on price.

    avatar Monika Miles says:

    One thing that I don’t think has been addressed much,
    and is very important, is the issue of a product’s taxability. There is
    much talk of streamlining rates and filing, but currently the states have
    differing laws on whether a particular item (for instance, food or
    clothing) is taxable in a state. If e-retailers have to understand the
    taxability of their products in each state, that’s where the bookkeeping
    nightmare could come in. This issue of taxability is a big reason that the
    states have been unable to get full compliance in the Streamlined Sales Tax
    Program (SSTP), even after over 10 years of efforts. The SSTP’s mission
    was to get all 50 states on board with a “streamlined” approach, rates,
    laws, and taxability. They have been unable to get to even half of that.
    If this were an easy fix, it would have happened already. Congress’s
    intervention will not magically answer all of these questions, and therein,
    I believe, comes the recordkeeping nightmare.

    avatar Katherine Brooker says:

    Thanks, Monika, for your insight. If there’s anything definite about the Marketplace Fairness Act, it’s that the bill is confusing small business owners.

    avatar Phil Rooke says:

    E-commerce should offer greater choice, quality, service and price than offline experiences to customers. A federal e-commerce tax would allow the playing field to be leveled. Price will be based on service, efficiency and quality not on where you are able to position yourself to optimize tax. This would allow companies like Spreadshirt to create localized production units closer to customers and provide better customer service with faster delivery.

    avatar Katherine Brooker says:

    Thanks, Phil, for weighing in on a highly-debated topic. Some companies, such as yours, view the MFA as an opportunity. Others see it as a threat. One thing for small businesses to consider is that the threshold applies to each state. If you sell $1 million worth of products across 3 states, you wouldn’t be required to collect sales tax (unless one of the states was your own.) You have to sell more than $1 million in a single state to be affected. This, at least,is how the bill currently reads.

    avatar Katherine says:

    Online retailers will always provide something of unique value to their customers. I find things online in minutes that I could take me months of years to discover in a traditional store. And I can make the purchase without leaving home. There is talk of raising the threshold to $10 million from $1 million, which would relieve the burden of the MFA for most small businesses.

    avatar Jim Everich says:

    If it passes, this law will put enormous pressure on small to medium sized companies. For starters, these companies 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. At the same time, this will create opportunities for eCommerce players if they can provide the platform to enable sellers to easily get up and running across state lines, and apply the appropriate sales tax and value added taxes through the Cloud. Net net, this Bill will add more costs and drain more resource from businesses that should be focusing on their products and services unless they are paying close attention to their back-end platform provider.

    avatar Katherine Brooker says:

    Thanks, Jim, for contributing to the discussion. I imagine there will be all-in-one software on the market to make the tax collection process less tedious and time-consuming for small business owners. If the cost of such software is reasonable, it could offer a relatively painless solution for small business owners.

    avatar Elle Kaplan says:

    The Marketplace Fairness Act will effectively just enforce a tax that
    already exists. In states that charge sales tax, we are supposed to
    self-report our taxes for online purchases, so this legislation would
    essentially formalize that. It would mean that large, online-only
    retailers, like Amazon.com, are held to the exact same parameters that
    already affect brick-and-mortar stores.

    This Act will only affect online retailers that have reached at least the
    one million dollar mark in a given state. So, small businesses and budding
    entrepreneurs with online shops will not be affected. Furthermore,
    individual states have discretion as to how this law will be enforced, in
    keeping with their current sales tax laws.

    avatar Katherine Brooker says:

    You make a valid point, Elle. Truly small businesses will not be affected under the proposed wording of the bill. But the language of the bill could change — for better or worse — while under review by Congress. For small business owners who are concerned about how the MFA could affect their business, now would be a good time to get to know your local Congressperson.

    avatar Sarah Bundy says:

    This has been an issue for affiliates and internet marketers for a while now and is an issue that will continue to grow as more offline businesses come online. good to know the issues and updates around the space so people can make better decisions on what to do internally.

    avatar Katherine says:

    Thanks for joining the discussion, Sarah. And, you’re right, it’s important for business owners to prepare for the possibility of the MFA passage so they can consider their options and make the best-for-them decisions.

    avatar George Ross says:

    Man this is confusing!! Not the article. The article was actually really well-written and researched and is making me think and ponder more than I’m used to! It’s making my brain hurt, but in a good way. So congrats to the writer on that! This is going to be really frustrating for online buyers, who now only have to pay sales tax if they buy from a company in their own state. I personally hate it when I’m checking out online and discover that money has been added to my total that I hadn’t planned on, then I see it’s because the company is in CA (where I live) and I always say drat (or some more manly expletive!) If this law goes through I’m sure I’ll definitely be using the actual curse words… as many as I know!

    avatar Katherine says:

    You’re not the only one confused, George. A lot of people will be saying “drat” or worse if the law becomes effective. If it does, let’s hope the additional tax revenue the states collect goes to good use.

    avatar Jake Richards says:

    Wow, I had no idea about this. This is going to suck majorly for online business owners, who, if this act goes through, are going to be subject to auditing in all but 6 states! Yikes! That is a hell of a lot of stress this act could hang over online business owners!

    avatar Katherine says:

    The auditing component of the bill certainly has many small business owners alarmed. Some aren’t concerned so much about the hassle of collecting taxes but by the prospect of being audited in 9000 tax districts. Thanks for your comment.

    avatar Winnie Williams says:

    Great call-to-arms article!! I wonder how many online business owners are writing to their Congress representatives and making picketing signs as I write this! There’s a lot at stake here. This is not an issue that can just be ignored because tax laws are boring and confusing. Because if you’re an online business and this goes through, it most certainly will affect you! And if you’re an avid online shopper, this most certainly will affect you too! I wonder if this goes through how many online shopping converts will go back to shopping in the real world. And I wonder how many online businesses will be put out of business.

    avatar Katherine says:

    I hope not many, Winnie. But any concerned online business owner should certainly spare the time to make his feelings known to Congress.

    avatar Joe Bright says:

    If charging sales tax on online purchases bought out of state could get more people to shop in actual stores rather than online, can this same sort of logic be brought to books? Charge more tax for people to read books online on devices such as Kindle, and maybe we’d get more people in the store buying actual books?! And they wouldn’t be getting closer and closer to becoming extinct?! This is making me nostalgic for a time when we had to have actual human interactions and when people got their information from the real pages of a book rather than online.

    avatar Katherine says:

    Ahh, Joe, I’ll do everything I can to keep real books from going extinct. No digital device can recreate the turn-paging thrill of a paper book.

    avatar Jennifer Davis says:

    If all’s fair in love and war, is all fair in the game of sales? I wonder if the state with the lowest sales tax will suddenly be getting a plethora of online purchases. Consumers might figure, if we’re going to be taxed, why not find online retailers in the state with the cheapest taxes? And then all online retailers might want to relocate to that state! I can see people Googling “state with lowest sales tax” now, just to be prepared in case this act is passed!

    avatar Katherine says:

    Excellent point, Jennifer, but as the law currently reads, you’d be charged the tax for your home state no matter where you purchased your product. If you live in New York, for example, you’d pay the state rate whether you ordered from New York, Idaho or Georgia.

    avatar Stephanie Thomas says:

    I think it’s ironic that the Marketplace Fairness Act is only 11 pages long but the trouble, confusion, anger and very possibly DOWNFALL it could cause could make a list of pages that goes on for miles… and miles… and miles.

    avatar Katherine says:

    Yes, things that start out simple often get confusing. Thanks for contributing to the lively conversation here.

    avatar Jeff McPherson says:

    Thank you for an intelligently written and highly researched article on the controversy of the Marketplace Fairness Act. It’s important for articles like these to be written so we can all be informed and all formulate informed opinions. It doesn’t matter what your opinion on this issue is, only that you aren’t ignorant about it. I sincerely appreciate this article for outlining the issues so we can all know what the hell is going on in the world of taxes and commerce.

    avatar Katherine says:

    Thank you, Joe, for reading the article and sharing your thoughts. Glad you found the information useful.

    avatar Elizabeth K. says:

    I’ve always thought it’s unfair that online businesses can get away with not taxing customers who buy from out of state. It’s not like we brick and mortar companies like having to tax customers. It’s just the law. And it’s not fair for online businesses to have an advantage over us. I think it’s about time that the playing field was leveled.

    avatar Katherine says:

    I don’t think any business likes to collect taxes. And as much as I understand taxes, I always feel annoyed when my $10 purchase costs nearly $11 after taxes. And it’s confusing when the town you live in has a different tax rate than the city next to yours. If the iced tea I buy at McDonald’s costs a penny more down the road, I feel a little cheated. Silly but true. Thanks for sharing the perspective of a B&M business owner.

    avatar Lucy M. says:

    This article raises some excellent points. I do a lot of online shopping so this issue really hits close to home. Shipping fees on some sites are bad enough, but taxes would really hike up the price of many of my purchases.

    avatar Katherine says:

    Thanks, Lucy, for joining the conversation. Let’s hope the taxes, if collected via the MFA, help cash-strapped states take better care of its citizens.

    I nominate Katherine, for chairperson of a committee that will keep this discussion on-going, all in favor?

    avatar Katherine says:

    If the discussion were here, in this friendly space, I’d accept. Thanks for making me smile, Oscar.

    avatar Jared says:

    A good start would be to share this article in your social media circles so we can educate others, particularly other business owners, about the MFA and its potential impact.

    avatar Katherine says:

    Thanks, Abbie, for the reminder that the MFA, as currently written, applies on a state-by-state basis. If a business owner has gross sales of $2 million in Kentucky and $900,000 in Connecticut, the owner would only collect taxes on behalf of Kentucky.

    avatar Katherine says:

    Thanks to everyone for commenting and participating in this discussion of the Marketplace Fairness Act. As to the suggestions of two readers that I chair a committee on the subject and spread the word via social media, I am already promoting this article across all of my social media platforms and am planning to write additional articles on the subject. Whether you’re for or against the proposed MFA, it’s critical that you stay informed. Anyone who wants to add their voice to my ongoing commentary is invited to contact me via this forum or through my website.

    avatar john says:

    our law makers are going against our constitution! why should the crooked politicians – who are the only ones who will benefit – even bring this up? the people know it is all a scam and all of the rhetoric is just propaganda. how can they pass laws that the public does not want? the crooked media!!

    avatar Katherine says:

    Thanks, John. A lot of business owners agree with you.

    avatar andy says:

    Fingers crossed nothing like this happens in the UK!

    avatar Katherine says:

    Some U.S.-based e-tailers owners say they might move their official headquarters to the UK if the MFA passes. Would this make sense?

    avatar Ralyn says:

    I would like to point out that it’s misleading to call this an internet sales tax. The bill states, “remote sales” which will also over-burden many small brick and mortar stores that do phone/fax and mail order sales very adversely.

    The big mega box store retailers that are behind and supporting this bill are the very same ones that ran most of the small mom & pop brick and mortar stores out of business. Now they want to do the same thing to remote seller competition. Those big mega retailers have physical locations in most states, so this will not affect them one bit.

    avatar Katherine says:

    You make a very good point, Ralyn and one that hasn’t been fully explored, to my knowledge. If “remote sales” included mail order purchases, this could have a significant impact on small brick and mortar businesses as well as mail order businesses. One person told me she makes a lot of mail order sales to senior citizens who pay mostly by check. What happens, she wonders, when those buyers don’t include sales tax when they mail in payment?

    Katherine – What about the customers who still order from catalogs through the mail? The MFA incorrectly assumes every consumer places their orders from companies like AmeriMark on the internet and ignores the millions of consumers who continue to order from catalogs with paper order forms and checks. Our company received 3 million mailed in orders from customers in 2012 and I know of several competitors who also continue to receive a large number of mail orders each year.

    Those customers will bear the burden of computing the taxes due, accounting for county and city exceptions, tax holidays, and countless product exemptions. I’ve experimented with ways to summarize all the possibilities nationwide for our mail-order customers. I’m not finished, but my best solution so far is a draft 40-page insert of tax rates and exceptions.

    These customers, many of whom are older, will become too frustrated by the complex, inconsistent and tangled logic of state taxes to calculate the correct tax on their next mail-order and will simply stop ordering through the mail.

    Without common rates and other simplifications, the Marketplace Fairness Act will confuse and disenfranchise millions of consumers, in addition to increasing our costs of doing business.

    Finally…the Supreme Court, in its 1992 Quill decision, reaffirmed its long standing position that the Commerce Clause bars states from imposing their complex, inconsistent and excessively burdensome sales and use tax system on interstate commerce. The sales and use tax system is more complicated, inconsistent and burdensome today than it was in 1992. Congress must insist on simplification and reform of this system as a condition to any legislation requiring collection of taxes by remote sellers.

    avatar Katherine says:

    Excellent point, Louis. If I shopped by mail order catalog, I would never read a 40-page document before mailing a check. I’d guess about the tax I owed or not pay it at all if I weren’t accustomed to paying tax on such purchases. If I were a store owner, how would I collect such taxes and what would I do if a customer didn’t include the right amount — send a bill? The enforcement of the proposed MFA seems difficult at best.

    avatar Bill says:

    I you like to point out a few things in this bill first “Remote sellers are evempt form collecting sales tax if their gross remote sales are less then one million dollors in the preceeding year.” Not per state.

    If this bill does become law how do you think the states are going to know if a “Remote seller” has the reached 1M in remote sales. Answer audits that’s how they will do this for there is nothing in the bill that pervents that.

    The bill just says that State can only audit sellers once per year.

    avatar Katherine Kotaw says:

    Thanks for commenting, Bill. I could see this as becoming pretty unwieldy for states, too. Would they audit every remote seller in the country? If not, how would they choose which out-of-state companies to audit? I’m not siding with the states here, but your “how would they know?” question makes me wonder how much it would cost states to play detective on this issue.

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