Legislation that would require U.S. e-commerce retailers and others to collect sales tax is working its way through Congress. The Marketplace Fairness Act, which passed the Senate in May 2013, requires retailers that have gross annual revenues of over $1 million, and sell products and services in states where they don't have physical presences, to collect and remit state and local sales taxes in those states. The act therefore targets "remote sellers," such as e-commerce and MO/TO businesses that engage in interstate commerce.
Proponents of the act say that mandating sales tax collection for remote sellers levels the playing field with brick-and-mortar merchants, which are already bound by that requirement. Critics argue that this legislation, if enacted, would impose a heavy, if not nightmarish, tax collection burden on a growing sector of the economy.
Ben Goretsky, Chief Executive Officer at e-commerce gateway provider USA ePay, said that if the MFA becomes law, online retailers are going to need "massive amounts of help." That help will likely come from online shopping cart providers, since they will be the firms that will need to integrate new tax collection procedures into the online checkout software.
Gorestky said website hosting companies that provide e-commerce services and open-source shopping cart providers will have difficulty creating their own in-house tax collection solutions because of the complexity of the U.S. sales tax landscape.
"If I'm a merchant and I'm dealing with customers from 50 states, and let's say every state has on average 10 different tax zones, I could be dealing with up to 500 different tax zones," he said.
But that estimate is a fraction of the true size, according to tax collection automation specialist Avalara. The Bainbridge Island, Wash.-based company said the number of state and local tax zones, combined with additional tax obligations within those jurisdictions, amounts to over 11,000 in the United States.
Matthew Grattan, Senior National Director of E-commerce Sales for Avalara, said that, depending on the "rooftop address" from where a transaction originates, as many as six taxing authorities could levy taxes on that transaction. Avalara offers Avatax, a cloud-based software-as-a-service solution that automates the tax collection process for businesses.
According to an Avalara whitepaper, the sales tax collection debate began in 1992 with a U.S. Supreme Court decision that remote sellers did not have to collect sales tax because it posed an "undue burden on interstate commerce." That opinion has been challenged ever since by brick-and-mortar retailers.
In Ecommerce and sales tax legislation: Understanding ecommerce & sales tax, Avalara said tax collection advocates gained momentum in late 2011 and early 2012 when online giant Amazon.com, long an opponent of such legislation, shifted its position and began to collect sales tax for certain states, including California.
Momentum for the tax collection mandate was also spurred by the budgetary woes faced by states following the economic collapse of 2008 and the subsequent "Great Recession." Avalara cited a 2012 CBPP survey that said states experienced a combined revenue shortfall of $191 billion in 2010. "The loss of sales tax revenue associated with online retail has become increasingly important in the face of declining state revenues, and in light of the fiscal crisis of the past few years," Avalara said.
States lost $11.4 billion in sales tax revenue they could have collected from e-commerce businesses in 2012, according to University of Tennessee research.
Goretsky recognizes that brick-and-mortar retailers are not pleased that e-commerce businesses can charge lower prices for the same items because they don't have to collect sales tax. But he believes the MFA is a bad idea. "Honestly, if it was up to me, I would leave things alone," he said. "We don't have the easiest tax system out there right now. And to throw this into the mix? It's going to open up a can of worms."
Like the debit card price capping imposition of the Durbin Amendment to the Dodd-Frank Act of 2010, the MFA would represent another poorly designed intrusion into the industry, Goretsky added. "We're almost at a point where we've reached our brink," he said. "This might drive businesses over the edge."
He noted that the impact of the Durbin Amendment was lessened only when powerful forces in the industry got involved at the last minute. He hopes the same scenario does not play out with the MFA. Goretsky thus recommends ISOs and merchant level salespeople educate themselves about the issue and then turn around and inform merchants of it.
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