The Marketplace Fairness Act (MFA) is a piece of federal legislation that would allow states to require online and catalog retailers, also known as remote sellers, to collect sales tax on all sales and remit those taxes to the appropriate locality. Remote sellers with $1 million or less in annual remote gross sales and no physical presence in a state are exempt from the MFA. The over-a-million-dollar minimum means that the MFA will be irrelevant for a large number of smaller online businesses.
For buyers, the new law means that if you purchase an item online from a seller, you will have to pay sales tax on that item if you live in a state that has a sales tax. The only exception would be if the seller is exempt from the MFA because of its size. In states with no sales tax, buyers will not be impacted by the new legislation. However, online sellers in states with no sales tax will have to start collecting sales tax on sales made to customers in other states unless those sellers are exempt under the new law. For information on current rules for collecting sales tax for Internet sales in any state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.
Before a state can require remote sellers to collect sales tax, the state must simplify its sales tax laws. This requirement is included in the MFA to accommodate two Supreme Court cases dealing with state sales tax rules. In one case, the Court held that collecting sales tax from multiple states applying different tax laws would be unduly difficult for businesses. The second case reaffirmed the first case and also held that businesses with no physical presence in a state were not required to collect sales tax in that state. However, the Supreme Court also stated “that Congress has the ultimate power to resolve” this issue.
A state may comply with the MFA’s sales tax simplification requirement in one of two ways:
- the state can adopt the measures contained in the Streamlined Sales and Use Tax Agreement (SSUTA). Twenty-four states have already done so. Any state that is in compliance with the SSUTA will be able to require sellers to collect sales tax from their residents at the start of the first calendar quarter that is at least 90 days after the MFA is enacted.
- the state can meet five simplification rules contained in the MFA itself and their ability to collect the sales tax will begin six months later. These rules include: giving sellers advance notice of any rate changes in the state; designating one state organization to handle sales tax registrations, filings, and audits; establishing a uniform sales tax base throughout the state; using destination sourcing to calculate sales tax rates for out-of-state purchases; providing free software to help with sales tax compliance; and holding retailers harmless for any errors from relying on systems and data provided by the state.
The MFA comes after years of debate at both the state and federal levels. That debate has involved at least two arguments. First, local bricks-and-mortar businesses have long argued that, under current law, they are put at a competitive disadvantage versus remote sellers because local businesses have no choice but to collect sales tax from their customers. This lack of fairness underlies the name of the Act. Second, state governments have argued that they lose a substantial amount of revenue due to remote sales where the sellers do not charge sales tax (and where the buyers do not pay the corresponding use tax). Proponents of the MFA argue that, with the advent of substantial Internet sales, as well as computers and software able to handle even extremely complex sales tax rules, the old rules embodied in the Supreme Court decisions are no longer appropriate and should be replaced.
Congress is expected to vote on the MFA in May 2013. Watch for updates in this rapidly evolving area.