Jan 10, 2012

Marketplace Fairness Act Could Fundamentally Change Competitive Landscape of Retailing

2012 could mark a pivotal year for retailing in the United States if Congress approves legislation to allow states to collect existing sales and use taxes from online retailers and catalog companies that have no physical presence in their jurisdiction. The intent of the legislation is to create a more equitable retail environment so that brick and mortar and online retailers are collecting the same taxes.  The impact on ecommerce sales is unclear.

Proposed in November, the Marketplace Fairness Act (S.1832), provides states with the ability to enforce existing state and local sales and use tax laws in a way that does not unduly burden e-commerce. No state is required to collect sales and use taxes by the legislation, but it would clear the way for states that do collect such taxes to begin collecting them from remote sellers.

Sponsored by Senator Mike Enzi (R-WY), the legislation has four Democratic and four Republican co-sponsors in the Senate – the most ever for such legislation. Under current law in 45 states, consumers are supposed to pay sales taxes on the goods they purchase, but online sellers are not collecting the tax in the same way that local brick-and-mortar businesses are.  Many proponents of the bill argue it will help bolster local small businesses and state coffers by leveling the playing field between brick-and-mortar and online retailers.

A matter of fairness
This legislation is being supported by a wide variety of retailers, manufacturers and organizations, including Outdoor Industry Association (OIA), the American Specialty Toy Retailing Association and The National Bicycle Dealers Association. Multi-channel retailers like REI, Sears Holdings Corp. and Wal-Mart Stores Inc. also back the measure as does Amazon.com, which has been collecting sales taxes on behalf of Toys R Us and other retailers who sell through its site. Premium brands also support it because it’s likely to minimize channel conflict.

OIA backed the legislation in November because it felt brick-and-mortar specialty outdoor retailers are at a competitive disadvantage to Internet-only retailers that don’t always collect sales tax.  OIA believes that e-commerce, which now comprise about 10 percent of outdoor product sales, should be promoted and cultivated, but not at the expense of other sales channels. Finally, OIA believes federal legislation that sets national standards is preferable to a piecemeal, state-by-state approach that could cause enormous confusion and impose far greater costs on retailers.

Before the Marketplace Fairness Act becomes law, however, its backers will have to overcome objections in Congress. Ironically, one of the biggest involves how to best protect small business. Current language in the bill exempts sellers with less than $500,000 in gross remote sales, which many find too low.

 What is a small business?
“$500,000 is not really that big a business,” notes Tim King, president of Backcountryedge.com, which is based in Pennsylvania. “We probably do that much in California alone. It opens up a loophole where these sleazy operators will come out of the woodwork and start 50 different websites and that won’t be good for the marketplace. There are a lot of good people with strong moral foundations on the Internet, but it’s also still the Wild West.“

The bill does allow tax authorities to aggregate such sites for the purposes of determining eligibility, but advocates concede enforcement will hinge on the initiative of each state.

King does not contest the fairness argument, but argues that all retailers should be compensated for the costs of collecting revenue for the states. An earlier version of the bill introduced by Sen. Dick Durbin, (D-IL), included such a provision, but could not gain approval of Senators in California, New York and Florida.

 “We are a small business trying to keep people employed and the last thing we need is for some additional regulatory expense that does not help create jobs or help us become more efficient in the market place,” said King.

Unlike previous bills, S.1832 only applies to states that either belong to the Streamlined Sales and Use Tax Agreement  (SSUTA) or adopt minimum simplification requirements. The bill also requires states to provide software and services to remote sellers to facilitate collection and to certify third-party software vendors. Finally, it indemnifies retailers for any errors caused by faulty information states provide.

Scott Peterson, executive director for the Streamlined Sales Tax Governing Board, Inc., which represents state tax authorities on the matter, said retailers’ implementation costs will hinge on what type of POS systems a retailer uses.

“If using a modern POS and accounting system, the cost is minimal,” said Peterson. “If you built your own POS system and you are the only person in world who knows how it works, it will be more expensive. If you have different systems for your brick-and-mortar, catalog and online stores, it will be greater. It’s very retailer specific.”

King, however, is concerned that the SSUTA will fall short when it comes to reconciling the myriad ways taxing jurisdictions classify goods and that the ensuing confusion will end up imposing higher than advertised costs on online retailers.

“The devil always is in the details,” King said. “They are only providing the data and services for the retailer’s system to retrieve the tax amount due. The retailer’s system must still be modified to handle the classification data and process the tax amount. If I have to go through and reclassify every item in inventory for 50 different jurisdictions, that’s not something I can put an entry-level employee on. This is a much greater expense than most folks realize.”

OIA is in regular communication with the bill’s sponsors and has communicated some of these concerns. OIA will continue to consult its members to identify ways to minimize the burden on retailers and make the legislation as use as possible.

For more background on the bill, readers may want to view a synopsis prepared by Streamlined Sales Tax Governing Board, Inc.