Taxation for Small Business' in Marketplace Fairness Act

The Marketplace Fairness Act is embroiled in a systemic conflict between local government’s aim for increased revenue versus small online retailers burden of navigating the varying sales taxes. Furthermore, the Supreme Court’s undying decision in Quill v. North Dakota provides precedent that states can require retailers to collect sales tax only if that business has a presence in the state, yet in a recent turn of events this decision is being challenged in order to overturn the physical-presence rule as outdated and unfair by South Dakota’ and 35 other states. Thus, this summary aims to present the baseline arguments surrounding the issue, actions taken at both the state and Congressional level, and the general layout of the respective issue. The Marketplace Fairness Act has been of increasing relevance with the emergence of dominant online retailers that continue to capture more and more of American’s shopping patterns. The implementation of the Marketplace Fairness act, revolves around the state's ability to compel out-of-state retailers to collect and remit sales tax on purchases made by in-state customers. Given that: the states simplified their sales tax laws and processes by joining the Streamlined Sales and Use Tax Agreement, and the seller had more than $1 million in total sales to customers in the US annually as stated in the Senate bill. After this bill was introduced in the Senate, a bipartisan group of representatives introduced the Remote Transactions Parity Act in the House. Yet, the House bill included one key exception, the definition of a 'small seller'. The House bill sets the threshold for exemption from responsibility for sales tax collection at $10 million in total nationwide sales for the first year, $4 million for the second year, $1 million for the third year, and then eliminates it from the fourth year on.

As states and localities vary tremendously on rules to collect sales tax, one important aspect of the Marketplace Fairness Act is the stipulation that states only qualify to compel remote sellers to collect and remit sales tax if they have joined in the Streamlined Sales and Use Tax Agreement (SSUTA). Which allows for greater standardization as an outgrowth of the Streamlined Sales Tax Project (SSTP) which arose out of the Supreme Court decision in the 1992 case of Quill Corp v North Dakota. The case of Quill Corp v North Dakota is the backbone of which the entire argument for this tax rests upon, as it stated in part that states could not compel out-of-state sellers to collect and remit sales tax because the state and local rates and regulations made it too complicated to be practical. Furthermore the ruling claimed that states could only require retailers to collect sales taxes if it had a physical presence in that respective state.The loss of tens of billions of dollars in tax revenues as a result of the explosion of internet sales has enticed many states to push for an appeal on the Supreme Court’s past ruling as a way to push forth with the collection of sales tax from online retailers. The attorneys general from thirty-five states and the District of Columbia signed onto a letter of support for South Dakota’s legal bid to collect taxes from out-of-state online retailers. Thus evident that these jurisdictions are ready to rely on a new electronic consumption tax to fund their local government functions. In South Dakota vs. Wayfair, Overstock and Newegg, they aim to annul the physical-presence rule as it is reminiscent of the order-by-catalog industry which is no longer of prominence and they hope to champion the struggling 'brick and mortar' retailers who must collect sales taxes.

The recent Senate bill, introduced in 2017, allows member states under the Streamlined Sales and Use Tax Agreement are authorized to require sellers—other than those covered by a small seller’s exception—to generally collect and remit sales and use taxes on remote sales sourced to that state. The bill provides the ability for states that are not members to the agreement to also require sellers to remit sales and use taxes as well, if certain requirements are met. In November, 15 friend-of-the-court briefs were filed urging the justices to hear the South Dakota case. They came from groups that represent retailers, wholesalers and shopping centers as well as the National Governors Assn. and law professors and economists. Last month, several anti-tax groups joined Internet sellers in urging the court to turn away the appeal. 'I really worry about the impact on small to mid-sized businesses. This would unleash tax collectors to pursue them all over the country. And they may not to be able to absorb the compliance cost,' said Carl Szabo, general counsel for NetChoice, a trade association for online businesses. He said small, web-based firms could face tax audits not just from 45 states, but from the thousands of municipalities with their own sales taxes. The Marketplace Fairness Act is a divisive issue that stems from the interpretation of how sales’ tax variances will impact on small online retailers. Thus, those who are in favor of the respective act claim that it creates a level playing field by ensuring Internet retailers meet the same tax responsibility as local businesses.

One of the central figures in the recently introduced Senate bill, Lamar Alexander R-Tenn., stated “The Marketplace Fairness Act is about supporting jobs and services we have in our towns while ensuring states have the ability to collect taxes they are owed. Right now, thousands of local brick and mortar businesses are forced to do business at a competitive disadvantage because they have to collect sales and use taxes and remote sellers do not. This legislation promotes internet fairness by putting Main Street businesses on a level playing field with online retailers. In 2013, the Senate passed this bill with bipartisan support. The main proponent for the implementation of this bill is due to state and local governments being increasingly deprived of critical revenue as a result of lost consumer taxes. Less tax revenues mean that state and local governments have fewer resources for services like education, law enforcement, and social services. In November, the Government Accountability Office estimated state and local governments are collecting 75%-80% of the taxes they are owed from 'remote sellers.' It projected the annual loss for those governments as between $8.5 billion and $13.4 billion. However, lawyers for the states cited much higher losses, including an analysis by the Marketplace Fairness Coalition, which estimates revenue losses of $33.9 billion this year and $211 billion from 2018 to 2022 if the physical presence rule is unchanged. With Internet sales are anticipated to reach $500 billion by 2018 according to Forrester it would be of great benefit to the respective governments to harness these sales in order to provide greater amounts of services to the community.

Those in defiance of the proposed Marketplace Fairness Act argue that with American consumers spending hundreds of billions on goods sold over the internet each year. Lawmakers in fiscally challenged states would like to force consumers to pay these taxes to improve their finances. Yet, this idea that by leveling the “playing field” between large online retailers and local businesses, it would be of unequivocal benefit to the small companies is not entirely true. Rather, it would be extraordinarily challenging and expensive to collect taxes on goods sold online. Thus with rules on collecting sales tax varying from state to state, and even locality to locality it would be of immense difficulty for these small businesses to keep track of the plethora of data. The difficulty for small businesses to navigate the variance in sales tax rules would be a boon for the cyberspace retail giants and big-box stores who would have the capabilities to purchase the expensive software necessary for these companies to keep track of such extensive amounts of data. Meanwhile, some states have already passed legislation to force online retailers who have a physical presence in their states to collect taxes but loophole-seeking behavior by consumers seeking to avoid paying sales taxes on their purchases have instead sought out retailers who are outside of such states and not required to collect the tax. Therefore, the pinnacle issue of creating a systematic balance of prices in order to allow for fair competition is still breech.

These small businesses would carry the burden of trying to apply such an online sales tax. They would need special software to navigate the varying sales tax rules from each state. They would need to hire more employees to deal full time with the software used to calculate the state and local sales taxes. And, they could potentially see their sales drop as consumers once again alter their behavior to find the best price. When costs rise, consumers buy less or look for alternatives. This could lead to many small businesses around the nation, dependent on sales from the internet, going under. It is no wonder that big-box retailers and online behemoths are advocating for the Marketplace Fairness Act. They already have the infrastructure in place to traverse the tricky taxation landscape from state to state, and they can absorb the costs of complying with the thousands of tax codes around the country. As these discussions renew in Congress regarding the collection and remittance of online sales taxes, lawmakers should keep in mind that their actions may negatively affect small businesses throughout the American economy. Passage of the Marketplace Fairness Act or similar legislation would be devastating for mom and pop stores and consumers. It would also not solve the problems that taxpayers face in states with large deficits. Rather they seeking more revenue, these states should be cutting wasteful spending. Supporters of small web-based businesses argue that Congress should not foist on them the duty to collect taxes that are owed to more 12,000 city and county jurisdictions across the country.