Editor’s note: This article was also posted on Wired Insights.
In May, the U.S. Senate passed the Marketplace Fairness Act, legislation that would require out-of-state retailers to collect and remit sales tax on all remote e-commerce transactions. I’ve since been approached by a number of customers and prospective partners who ask, “What exactly does this mean for my company?” The answer: It means higher prices to some customers and a substantial increase in the complexity and cost of tax compliance for anyone who operates an e-commerce business.
While the details will ultimately depend on how the House formulates its version, the legislation would undoubtedly increase compliance pressure for online businesses. The scenario could leave businesses forced to navigate approximately 11,000 taxing authorities in more than 100,000 ZIP codes. Many businesses simply lack the resources needed to properly comply.
Supporters of the legislation maintain that an increase in price to some customers with the inclusion of a sales tax finally levels the playing field for small, brick-and-mortar retailers struggling to stay afloat. Opponents, including eBay, argue that it creates an unfair tax burden for small online businesses. As executives on both sides of the issue continue to deliberate, the smart business leader takes a more proactive approach—one that prepares its company for the changes associated with more states passing similar legislation on their own or what appears to be the inevitable reality of congress passing some sort of federally mandated online sales tax.
Change is never easy, and the Marketplace Fairness Act brings this concept into a new light. For example, online shopping usually provides convenience and more selection. However, if sales tax is required at the point of e-purchase, the online retailer will be required to match the product to a taxing authority and then apply a tax rate all in a fraction of a second. While the technical and logistical burdens of the bill get the most attention, there are also significant legal ramifications. For example, every state operates on a different auditing process, requiring specific forms and deadlines in order to avoid penalties or fees. Mistakes are easy to make but harder to correct. The tax compliance cost and related tax risk imposed on the online retailer will be substantial.
To help your business successfully prepare for some of the proposed legislative changes, here are some actions to consider:
- Determine where you currently do not collect and pay sales tax. This law will add all the remainder of states to your filings.
- Analyze the complexity of your current online product offerings and e-shopping capabilities to plan for and estimate the cost of adding a tax calculation.
- Consider an alternative to managing tax compliance, collection and remittance on your own and outsource the entire online shopping process, including the domestic and international tax risk.
Every participant in the supply chain must determine the best way to approach implementing new regulations like those outlined in the Marketplace Fairness Act. And while complying with this web of complex requirements can be challenging, electing a partner with a comprehensive tax management solution across global markets can yield significant benefits. The right partner can reduce strain on internal resources, navigate complex legal issues, improve profitability, ease new market entry and ultimately drive down costs.
Bottom line: Whether a federal online sales tax passes under the name of “Marketplace Fairness Act” or something different down the road, it’s going to happen. We’ve already seen similar battles play out across the globe, and it’s only a matter of time before the U.S. follows suit. States continue to pass similar rules without waiting for Federal legislation. Minnesota is one of the latest states to pass a law requiring online sales tax to be collected by out-of-state retailers.
So if you want to put your business two steps ahead of the rest, start planning now. Do you have any questions about Marketplace Fairness Act that I did not address? If so, leave a comment below.