Problems With The Marketplace Fairness Act

8/20/14
 
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from NCPA,
3/21/14:

Last year, the U.S. Senate passed the Marketplace Fairness Act (MFA), allowing states to require online retailers to collect and remit sales taxes for each buyer’s state. Though the House of Representatives is unlikely to pass the bill anytime soon, the issue will likely come up again. Under the Senate bill, online retailers could collect an estimated $22 billion to $24 billion in sales tax that now goes uncollected.1

The MFA is in response to the Supreme Court’s 1992 Quill vs. North Dakota decision, in which the Court ruled that a business could not be forced to collect and remit a state’s sales tax unless it had a physical presence (nexus) in the state.

The Marketplace Fairness Act should be unnecessary, because 45 states already have laws requiring purchasers of online or out-of-state products to pay a “use” tax on these purchases if the seller does not charge them sales taxes. The individual taxpayer is responsible for reporting purchases and paying the tax, but states rarely, if ever, enforce payment. The MFA would make sellers responsible for collecting any taxes due on sales, but there is little evidence the states would collect the additional billions of dollars in revenue they claim.

The Marketplace Fairness Act of 2013. States that choose to enact the MFA would have to meet five simplification mandates, including establishing a uniform sales tax base for use throughout the state, notifying retailers 90 days in advance of any rate changes, and designating a single state organization to handle sales tax registrations, filings and audits.

However, states that are already part of the Streamlined Sales and Use Tax Agreement (SSUTA) need only adhere to the requirements outlined in the SSUTA agreement. The SSUTA is a voluntary compact of which 24 states are members. It is designed to simplify sales and use tax collection from vendors in cross-border states by requiring participating states to adhere to streamlined rules.

The Use Tax. Currently, 45 states require purchasers of online or out-of-state products to report their purchases on their tax forms and pay a “use” tax.

Compliance rates are low for many reasons. First, many residents are not even aware that a use tax exists in their state for out-of-state or online purchases. Second, the use tax is not a reporting requirement on a federal tax return, therefore not subject to IRS penalties. Third, much like a sales tax, the use tax is subject to bizarre exemptions that further complicate compliance.

Tax Revenue Resulting From the MFA May Be Overstated. Will the MFA really generate all of the revenue the states claim they are losing?

The National Conference of State Legislatures (NCSL) estimated the loss of tax revenue at $23 billion in 2012.

[It was] projected e-commerce would grow to $4 trillion by 2012, including purchases by consumers from businesses, and by businesses from other businesses.

[Actual] 2012 figures are not yet available.

The MFA Would Burden Sellers. Proponents of the Marketplace Fairness Act say it will make sales tax collection easy for vendors. After all, states must provide up-to-date software (free of charge) to online sellers so they can efficiently collect for 9,600 taxing jurisdictions. But the Act itself implies that there is a significant compliance burden, simply because it exempts small businesses with revenues under $1 million. Moreover, the MFA does not provide all the protections for vendors that apply under the Streamlined Sales and Use Tax Agreement.

Conclusion. States may have legitimate concerns in collecting sales tax from online vendors and leveling the playing field between them and brick-and-mortar stores, but the Marketplace Fairness Act is not the way to accomplish those goals. The MFA essentially punishes vendors by requiring them to collect taxes, which is [the] government’s job. States with use tax laws on the books should use their own taxing authorities to enforce compliance rather than burden the private sector with the task.

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