By Adam Atlas
Attorney at Law
The federal Marketplace Fairness Act (S. 1832) is not yet law. If it is enacted, as many believe it will be, online merchants will be under a strict requirement to collect the same sales taxes already charged by their brick-and-mortar counterparts.
Also known as the Amazon tax, the MFA is supported by associations of shopping centers and chambers of commerce, all of which are losing business to online competitors that do not collect applicable state sales taxes.
The purpose of this article is to serve as an early warning to the acquiring industry, for which the MFA may be as boisterous a topic as the Payment Card Industry (PCI) Data Security Standard (DSS), the matching of taxpayer identification numbers - or TIN-matching, and Visa Inc.'s Fixed Acquirer Network Fee (FANF), all rolled into one.
Just to put things in perspective, the MFA would levy taxes on billions of dollars of online sales and result in the collection of percentage points on the face value of those transactions.
The MFA would require out-of-state online retailers to collect state and local taxes just as in-state merchants do. The taxes applicable to each individual sale are a function of the location of the merchant, the location of the buyer, the type of goods or services sold and the purchase price. The online versus brick-and-mortar playing field would be leveled - at least on the subject of taxes. Driving and parking issues will still differentiate these two ways of shopping.
Naturally, no individual online merchant could look up the tax applicable to each of its sales in real time. Enter the MFA intermediaries. These businesses provide real-time look-up services for the tax applicable to a given sale.
For example, if I am selling a book from my online store, based in Arizona, and the buyer is in Vermont, the intermediary will be able to determine the correct tax that must be added to the total price for that individual sale. As a merchant, I would then automatically add the item to my shopping cart and collect the tax.
At the end of the month, the intermediary would bill the merchant for the tax levied that month. Then, the intermediary would remit the right amount of tax collected by the merchant to the correct state revenue departments. Intermediaries are compensated by the states for this effort, which is considerable, by a small percentage of the taxes they collect. In this sense, intermediaries are like state tax bounty hunters.
The acquiring market has a golden opportunity here to enable MFA intermediary services for their merchants. The pricing models for this additional service will vary across the industry, but one thing is certain: if the MFA becomes law, the acquiring market has an opportunity to earn fees in exchange for assisting in the delivery of MFA support to merchants.
How can acquirers integrate? Some of the MFA intermediaries are sophisticated enough to integrate at any level of our industry. For example, the look-up and tax-collection services may be sold to merchants, shopping carts, gateways, merchant level salespeople, ISOs, super ISOs, processors, third-party processors, Internet payment service providers, banks, or payment networks.
The service is needed, of course, at the merchant level. But like so many of the services in our industry, it can be offered to merchants through any of a number of channels. Acquirers that don't want to miss the (big) boat on this new service should probably engage with a competent MFA intermediary to integrate the intermediary's offerings into the suite of services they offer merchants.
How should ISOs prepare? Don't let your acquirer be the last to the MFA party. ISOs should query their acquirers to learn what their strategies will be and how ISOs will be compensated on revenue the acquirer would make from the new service should the MFA become law.
As was the case with the PCI DSS, TIN-matching and FANF, disputes will arise between processors and ISOs that cannot agree on how to price merchants and compensate each other for the new service. One way to minimize the number of disputes is to discuss with your processor how future regulatory items should be priced for mutual benefit.
Cash advance providers should think about their split funding arrangements and prepare for large automated clearing house debits from merchants in the form of sales tax remittances at the end of each month.
You may be tempted to dismiss this as a waste of time to prepare for a law that might never pass. However, one need only look at the towns going bankrupt around America to know that they need more tax revenue. The MFA attempts to correct the inherent unfairness of competition between online retailers who pay no tax and brick-and-mortar merchants that pay multiple taxes.
States' and municipalities' dire need for revenue to keep the lights on, together with the competitive disadvantage brick-and-mortar merchants currently face, will likely bolster bipartisan support for the MFA, or a similar initiative.
In the event the MFA passes, failure to collect and remit the applicable sales taxes could lead, as in all tax compliance cases, to serious penal consequences for merchants. Bringing all merchants into compliance will take time, but the power of the state to enforce tax code will motivate them.
Given the enormous sums of money in play, we should plan for extensive discussion of the MFA and possibly its integration into acquiring sales and processing. My firm publishes a short blog on the MFA at http://marketplacefairnessact.blogspot.ca with some useful links and background.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at email@example.com or call him at 514-842-0886.
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