Marketplace Fairness Act: What does it mean for us?

marketplace fairness

Ever since the Senate voted with overwhelming support for the Marketplace Fairness Act, it has been a hotly debated topic for businesses, governments and consumers alike. Better known as the “Internet Tax” bill, the MFA aims to “level the playing field” between Main Street businesses and online retailers by allowing states and local governments to collect sales and use taxes from online merchants beyond their borders.

There are always contentions whenever a bill is introduced and mentions the word “tax,” but what exactly does this mean for our local NC governments and economies?

Not a “New” tax…

The MFA does not introduce a new tax. For decades, due to the court ruling in Quill vs. North Dakota, online retailers have avoided collecting sales tax for different states due to the lack of a physical presence of a store or “nexus” within those states. While consumers are supposed to report any purchases for sales tax purposes, a negligible percentage of taxpayers are aware of that and even fewer do so. The MFA will require online retailers to collect sales tax for the states and local governments regardless of a physical presence in their jurisdictions.

How much more money?

There is no argument that the MFA would produce an additional stream of revenue for states, but the key question here is: how much more revenue?

The total amount of uncollected taxes for 2012 has been estimated anywhere between $11.4 billion to $23 billion by the bill’s supporters.

Opponents of the bill feel that those estimations are overstated. They estimate that only $3 to $5 billion in lost internet tax revenue would potentially be collected. While any additional amount would prove beneficial, a portion of a $3 to $5 billion dollar pie would have a far lesser impact than the more optimistic estimates of $23 billion. This additional source of revenue, they caution, would also come with detrimental economic costs for local small to medium businesses.

Economic costs?

There would be a cost of compliance on small e-commerce businesses from the bill. However, the bill does have built-in measures to lessen such costs:

  • Exclusion of small businesses with gross revenues under one million dollars
  • Free tax software to help businesses deal with the 9600 tax jurisdictions nationwide
  • Simplification and streamlining of state tax policies

Nevertheless, opponents still argue that the model “mom and pop” business has evolved along with the drastic change in consumer habits. The MFA would in effect, discourage current brick and mortar businesses from participating in online commerce to avoid compliance costs. It would also discourage the growth of online businesses that approach the million dollar revenue threshold. If they pass the million dollar threshold, they risk expensive compliance costs that may affect their profitability.

Furthermore, they argue that the retail industry has a notoriously low profit margin. Even the online retail behemoth, Amazon, only produces a 1% profit margin. Smaller online retailers with far fewer resources to absorb compliance costs could be “regulated out of business” argue opponents of the bill. This notion could be supported by the fact that Amazon and Walmart, indisputable leaders in retail, are ardent supporters of the bill as it would be more detrimental to smaller market contenders.

The Price of Fairness

There is little doubt that the collection of Internet sales taxes will be a boon to the state and local government budgets. The MFA would allow dated policies to adapt to the increasingly Internet-centered landscape of commerce. However, as with all major reforms and changes, it should be one that is approached cautiously, especially in a recession economy. Small to medium online businesses should be allowed to grow without being crippled by regulation while Main Street businesses should be given a fair chance to compete with them on price.

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