Article

Will an Internet sales tax bring fairness or confusion?

The Marketplace Fairness Act is causing a divide in the industry and has tax experts bracing for chaos.

May 15, 2013 by Natalie Gagliordi — Editor of KioskMarketplace.com, Networld Media Group

To some retailers, the Marketplace Fairness Act is anything but. If enacted, the contentious piece of legislation, which gained Senate approval last week, will require Internet retailers earning more than $1 million in annual sales to collect sales taxes for online purchases — a move that's pitting e-tailers against brick-and-mortars for a playing field advantage.

Opponents of the Marketplace Fairness Act argue that the bill would cause problems for small online retailers because they would be accountable for tax compliance across 46 states. Small online companies fear that this accountability would make them viable targets for an unprecedented number of tax authorities across the country.

Proponents of the bill cite the potential to make business fair for brick-and-mortar retailers from a monetary standpoint. The previous lack of enforcement of online sales taxes has given online businesses a price advantage, something physical retailers claim contributes to the showrooming phenomenon.

While it's still unclear how the final bill will look if it clears its next hurdle in the House, there seems to be a consensus: There will be winners, losers and some muddled tax law confusion as a result.

The winners

States are the obvious winners if the MFA is enacted. An article in the USA Today tallied the amount of lost revenue from states not collecting Internet sales tax to a whopping total of 11.4 billion. With the difficult fiscal situation facing many state governments, that potential revenue could be mouth-watering.

Small brick-and-mortar stores located in states that do collect sales tax also can place themselves in the winner's circle.

"If a brick-and-mortar store does not sell anything over the Internet, then [the MFA] makes the playing field more even for them," said Ashley Forte, a Chicago lawyer at Arnstein & Lehr where she's a member of the firm's Aviation and Tax practice groups.

Other winners include big-box retailers like Target, Walmart and Best Buy — all of which struggle to remain competitive against rival Internet retailers like Amazon (which happens to support the MFA).

The losers

Jake Weatherly, CEO of the online verification company SheerID, said that, if enacted, the MFA would cause increased costs at go-to online shopping sites that could significantly impact Internet buying behavior.

"While some retailers celebrate the Senate's vote in favor of the Marketplace Fairness Act, others are frantically trying to think of the best strategy to keep their customers," Weatherly said. "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."

In an infographic posted on Mashable, 61 percent of shoppers said they are opposed to the bill via a survey conducted by electronic postage software company Endicia. The survey also revealed that 44 percent of respondents planned to buy less online if the bill passes (with 75 percent reporting that they would shift their shopping to brick-and-mortar stores ... an obvious win for those retailers).

Other losers include the tax-free states of Alaska, Montana, New Hampshire and Oregon — which all came out against the legislation, stating that it's unfair for businesses based in those states without a sales tax to be forced to collect it from others.

The confusion

Not all online retail sites worry about keeping customers — some simply quiver at the prospects of complying with the broad-based tax collection duties.

"At first I was strongly opposed to collecting sales tax for all states," said John Burger, owner of the Texas-based online toy company Playfully Ever After. "But I don't foresee [the MFA] leveling the playing field with brick-and-mortar stores, because people will still be able to get items for less online and have a greater selection to choose from."

What Burger does foresee is a major compliance headache. Burger said the biggest impact will be on small Internet businesses and their ability to handle the reporting and payment of sales tax for every state.

"It currently takes me about 40 minutes pay my sales tax for Texas," he said. "I have to pull my sales tax data, review it, go to the Texas comptroller website, log in and pay my monthly sales tax. Imagine that multiplied times 50 for each state. That's more than 30 hours of labor."

Forte agrees with Burger on what she said is the obvious issue with reporting.

"In a relatively short amount of time, companies are going to need to figure out what they need to do to be compliant," she said. "Under the bill, states have two choices — they can either make modification to their state laws to make compliance easier or the state can join with the Streamlined Sales and Use Tax Association as a full member — which has its own laundry list of modifications."

There are currently 24 states that already are part of the SSUTA. However, Forte said if a retailer's state is not already a member there may not be much compliance pre-planning available. And even though the bill requires certified software to be provided by the state, it doesn't set forth what the certification requirements are, how many different types of software versions might be required, how often it needs to be updated, or which companies will get the licensing privileges.

"Overall, I think things are going to be more complicated, for a little while at least," she said. "Any time there's a big change to state taxation laws (this time, delivered through a federal bill) the water gets choppy."

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Photo courtesy of Tax Credits.