The Marketplace Fairness Act (MFA) is proposed legislation that will grant states the authority to require online retailers to collect sales tax, regardless of where they are located, at the time of the transaction just like local retailers. Fortunately, states must simplify their tax laws in order to enforce this legislation, which would ease the burden on retailers to calculate and manage.
States have been unable to enforce their own sales and use tax laws on sales by out-of-state, catalog, and online sellers generally due to 1992 Supreme Court decision. Some states already have legislation that requires sales tax to be collected on online transactions; however, most of these sales are still untaxed. On average, states depend on sales and use taxes for 20% of their annual revenue. This act could help state governments that have watched their sales tax revenue dwindle. A study by the University of Tennessee estimates the loss to states in 2012 was about $23 billion. In order to be eligible to enforce the act, using one of two options, states must simplify their tax laws.
- Option 1 is to join the twenty-four states that have voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA).
- Option 2 would require states to meet five simplification mandates listed in the bill, all to make the process of collecting tax stress-free for retailers.
What Does This Mean for Your Online Business?
Online retailers may be required to collect sales tax (not pay a tax) just as you would if you were a local brick-and-mortar store. This essentially evens the playing field for local businesses that have been required to collect sales tax all along and who have been in some states at a 5 to 10 percent price disadvantage. Many small online retailers are understandably concerned over losing this competitive edge and the additional costs of adopting new technologies to ensure compliance. Sales tax collection will be required on all sales shipped to the 24 states that are “full members” of the SSUTA. A full member is one in full compliance with the SSUTA, while an associate member is a state that will be in compliance within 12 months of joining the SSUTA.
If you are a small online retailer and your sales are less than $1 million in remote sales annually, you will be exempt from collection requirements and qualify for the Small Seller Exception. Remote sales are sales to customers in states where the seller does not already have a physical presence. Complying with the law is made easy by the SSUTA which currently has six Certified Service Provider platforms available for retailers.
Regardless of your sales volume, there are simple solutions at your fingertips for managing all your sales tax needs. Sales Tax Payment Service from Paychex can help you tackle the challenge of conducting commerce in multiple states with its sales tax payment service. Easily and efficiently calculate sales and use taxes on product categories, keep up with changing tax rates, and pay state sales tax on time. The Marketplace Fairness Act (MFA) may be enacted in 2014, so it’s important to prepare your small business for any changes in your current process. Paychex can you keep you up to date with the legislation and help you understand its impact to small businesses.