What You Need to Know About the Marketplace Fairness Act

Congress seems poised to pass the current Marketplace Fairness Act, also known informally as the “Internet tax.” The Senate cleared the path for the bill to be voted on, which will happen May 6. It seems that the Senate will pass the bill, which will then move on to the House. President Obama supports the bill, so if it passes the House, he will sign it.  

What is the Marketplace Fairness Act?

Here’s where we stand today: Currently, there is not tax on Internet sales where the buyer is located in a state in which the seller does not have a physical presence. This means that if I’m in New York and only have my business in New York, you’re in California and buy something from me online, I don’t have to collect California sales tax and you don’t have to pay California sales tax.

Today, if you buy something on Amazon.com and Amazon doesn’t have a warehouse in your state, you currently don’t have to pay sales tax. Meanwhile, someone who buys products on Amazon in a state where Amazon has a warehouse does have to pay sales tax.

The Marketplace Fairness Act will require that all states, including yours, collect sales taxes from all online purchases you make. Small retailers (those who make less than $1 million per year) are exempted from the Act.  

Why?

The stated goal with the act is to make it easier for online retailers to pay taxes and for states to collect taxes on products people are buying. In short, states are broke. They are desperate for new tax revenue.

Issues With the Marketplace Fairness Act

There are over 9,000 separate taxing jurisdictions in the United States. Online retailers earning over $1 million in sales are going to need to collect taxes and pay taxes in every jurisdiction where they make a sale. It may come as no shock that eBay is opposed to the bill, and has suggested that the bill be amended to raise the income limit exemption from $1 million to $10 million. Ebay sees this as a burden on smaller businesses, who the legislators are equating with large businesses like Amazon.

Who Likes the Bill?

Amazon, interestingly enough. While you may have thought that Amazon would oppose collecting taxes in every state, Amazon has suggested that it simplifies tax collection rules. Currently though, Amazon has locations (including warehouses and offices), in many different states and pays taxes in eight states. With a sweeping tax law, it will not be such a large burden on Amazon to collect tax in many states. In fact, it will likely be a larger burden for Amazon’s smaller competitors, those who earn over $1 million per year but nowhere near as much as Amazon. This comes as a bit of a shock, since Amazon fought California, Texas, and Pennsylvania, for years, as Amazon realized a huge competitive edge in not collecting taxes in these states. But, now with that advantage eliminated, it seems that Amazon would like to bring its competitors to the same level.

How It Will Affect You

If you live in a state that collects sales tax (ignore this people living in Alaska, Delaware, Montana, New Hampshire, and Oregon), you will have to pay sales tax on all online retail purchases. Online services, such as your Netflix subscription, are exempt. The days of going online to purchase cheaper products because you could avoid sales tax and still get free shipping will be over.