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The Marketplace Fairness Act and State Tax Revenue

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The Marketplace Fairness Act—There’s More “On the Line” Than Just Tax Revenue

Since e-commerce first blossomed, hundreds, possibly thousands, of brick-and-mortar stores have disappeared. Some were mom-and-pop operations, but the big names have not been exempt. For example, who would have foreseen the disappearance of Borders Books? While the reasons for this sea change in the retail world are varied, one of the major factors is a simple matter of sales taxes, or lack thereof. Merchants who sell online aren’t required to collect sales taxes, and online buyers, whether required to or not, seldom pay them. So, if the Marketplace Fairness Act (MFA) is passed, who wins and who loses?

The Biggest Winners from the MFA—the States

It’s estimated that the United States lost around $11.4 billion in sales tax dollars last year (and more than twice that amount according to the National Conference of State Legislatures). With federal subsidies being cut back, it’s no wonder that states are chomping at the bit for MFA passage.

Another big winner could be software companies that develop applications to handle compliance. With 9,600 taxing bodies in the United States, the hand-held calculator is sure to be insufficient. Just as tax preparation software serves the modern household, online sales tax compliance software could provide a gold mine for those savvy enough to develop and market it. And, given that the law as currently proposed requires states to supply the software, the demand is assured.

The Biggest Losers—Consumers

Whether the correct number is the commonly quoted $11 billion or the $23 billion advanced by the NCSL it’s fair to say that the consumer has been saving money the states have been losing. Ostensibly then, MFA is a big negative for consumers. However, advocates of the Act would argue that states support schools, libraries, first responders, infrastructure, and more. What good is it to save a few dollars on a trail bike if there are no trails? So, on the face of it, while the MFA is anathema to consumers, a case can be made that it will help provide important government services.

Smaller retailers could also be counted among the losers, since they might not have the resources to easily comply. To this end, eBay, an overall supporter of the Act, feels that the trigger threshold of $1 million in revenue (which exempts retailers below that amount from the law) is far too low and should be raised to $10 million. However, the legislators have not bent on this, and online merchants at the lower end of the spectrum are some of its staunchest opponents.

Who Supports the Marketplace Fairness Act?

Not surprisingly, as the biggest winners, state governments are salivating over the prospect that the MFA will become law, and it certainly seems possible that it will. When positioned as an amendment to a budget proposal in late March, the bill garnered 75 votes in the Senate, 15 more than needed to defeat a filibuster. When the actual vote came on May 6, 2013, support dwindled to 69 senators, but that was still far more than enough for passage. However, the bill is expected to face tougher opposition in the House.

Other big supporters are retailers like Sears, Best Buy, and any merchant with a large brick-and-mortar footprint. In their view, it’s an important step in the process toward leveling the playing field between them and online merchants.

And traditional retailers aren’t the only ones who support the bill. One of its biggest boosters is Amazon.com, the online sales behemoth. With its rapid proliferation of warehouse and distribution sites that are soon to be virtually everywhere, Amazon can also stake out its turf on the “leveling the playing field” argument.

But Will the Bill Have the Desired Result?

There are many who argue that should the MFA pass, downtowns and shopping malls will thrive, jobs will be created, and schools, roads, and social programs will have plenty of financing. But the reality may be a bit different. Some have suggested that the bill will stifle innovation and kill small entrepreneurs, as their larger competitors spread the cost of compliance over a much larger sales base. They also point out that, even if the most optimistic projections of $23 billion in gained revenue to the states is realized, it represents only 3 percent of the total state and local taxes collected in 2012, hardly enough to make a dent in state budgets.

While almost no one argues that the current system is fair (hence the Act’s name), no one wants to preside over the demise of traditional commerce. If passed, the ultimate impact of the Act won’t be known for some time, but it does look as if the MFA’s time may have come.