Editorials support Marketplace Fairness Act

April 30, 2013

The Marketplace Fairness Act has been all over the news in the last two weeks as it’s been debated on the Senate floor. The Senate is recessed for this week, but a vote on the bill is scheduled for Monday, May 6.

Most editorials on the topic have largely been in favor of online sales tax. Among the largest news outlets supporting it are:

(One notable exception to the general trend of support was the Wall Street Journal, whose April 17 editorial “The Internet sales tax rush” was effectively countered by the National Governors Association in a letter published on April 25.)

There have also been a lot of positive editorials from smaller local outlets, including:

If you’re interested in reading more, you’ll find a compilation of news articles on the Marketplace Fairness Act on marketplacefairness.org/news.

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eBay and the small business exception

April 22, 2013

In an email Sunday to 40 million eBay users, eBay CEO John Donahoe urged them to oppose the Marketplace Fairness Act unless the small business exception, which exempts online retailers with less than $1 million in out-of-state sales from collecting sales tax, is raised to $10 million or 50 employees.

We’re all for making sure small online businesses don’t have to spend time or money dealing with sales tax (that’s why we created TaxCloud in the first place), but here are three reasons that raising the exemption threshold doesn’t make sense:

1. At the $1 million threshold, most online retailers are already exempt. Nationwide, fewer than 1000 online retailers* have more than $1 million in total sales. (If we consider only out-of-state sales, that figure is even lower.)

2. Collecting sales tax doesn’t require the resources of a large company. The Marketplace Fairness Act requires states to provide free sales tax software and services for online retailers, so online businesses wouldn’t need to spend anything to comply with the bill.

3. Most small online retailers already use e-commerce platforms, which can easily provide add-ons that handle sales tax, just as they provide for shipping—making sales tax collection easy for all their retailers at once. And we’d lay odds that once states can require online businesses to collect sales tax, that’s exactly what they’ll do.

By exempting online retailers with less than $1 million in out-of-state sales, the small business exception already does what it was designed to do: ensure that small online businesses are not burdened by online sales tax collection. But raising the exemption threshold to $10 million or 50 employees would be a mistake.

*According to Internet Retailer‘s Second 500 Guide, only the top 980 online retailers in the nation had over $1 million in sales in 2011.

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Why online sales tax does NOT let states “tax beyond their borders”

April 22, 2013

One of the more common arguments we hear against online sales tax is that it would let states “tax beyond their borders.”

First, that statement is factually untrue—states can only tax state residents, and that wouldn’t change with online sales tax.

But online sales tax does mean that states could require out-of-state businesses to collect (not pay!) tax on sales to state residents. Some argue that this would be an expansion of state authority.

In fact, with online sales tax, states are simply taxing economic activity within the state—something they have always had the right to do.

And it’s worth noting that outside of sales tax, businesses that sell into a state are required to follow that states’ laws. For example, let’s say you live in California and purchase a camp stove from a company based in Minnesota. The camp stove is defective and causes a fire. The Minnesota company could be held liable for violating California product safety laws.

So why can’t states require out-of-state retailers to collect sales tax right now? Why do they need federal legislation, such as the Marketplace Fairness Act, to grant them that ability?

The answer goes back to a Supreme Court case, Quill v. North Dakota (1992). In that case, the court said that while it’s fine to require an out-of-state business that sells into the state to follow state law, it would be too difficult for out-of-state sellers to comply with state sales tax laws. In other words, Quill says that sales tax is an exception to the general rule that if you sell into a state, you have to abide by the state’s laws.

But with today’s technology, collecting sales tax is no longer difficult—so the reason behind the Quill decision no longer applies. And that means that there’s no reason for sales tax to be an exception to the rule.

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Why the number of sales tax jurisdictions doesn’t matter

April 1, 2013

Illustration by Cory Thoman - http://clipartof.com/1087428

So what does all that mean?

First, let’s be clear: It would never mean a sales tax return or an audit for each jurisdiction. The Marketplace Fairness Act says that there has to be just one central authority in each state that handles sales tax returns and audits. So no matter how many tax jurisdictions are in a state, there’s just one return to file, and if a retailer is audited, there’s just one audit from the state. And retailers who use state-certified sales tax management services don’t need to worry about audits in general—but more on that in a moment.

So what about sales tax rates, which can vary by jurisdiction?

The good news there is that the Marketplace Fairness Act requires states to provide sales tax management software or services (such as TaxCloud) for free. These programs check and update rates and product definitions for every tax jurisdiction, and it all happens behind the scenes, so sellers don’t need to worry it.

In the end, for online sellers, collecting sales tax is much like handling shipping. There’s a program or service to set up with the online store, and then the program handles everything—no matter how many tax jurisdictions there are.

Back to audits: When retailers use sales tax management programs from state-approved Certified Service Providers (CSPs), they never have to host an audit. The CSP deals with the state instead, so the retailer doesn’t need to worry about dealing with state officials and coming up with transaction records.

Rates, audits, returns, the number of tax jurisdictions—with sales tax management services, retailers don’t need to worry about any of them. It’s all taken care of.

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New York Times speaks out for sales tax fairness

March 27, 2013

The New York Times editorial board today made a persuasive case for online sales tax. It’s a simple matter of fairness, the piece says, and it goes on to point out why the Marketplace Fairness Act works as legislation:

The bill would not impose new taxes but would enable collection of taxes already due under state laws. It also overcomes the objection that sales-tax collection would be too difficult for online retailers. It requires states . . . to harmonize their sales-tax rules (24 states already have) . . . . It also requires states to provide tax-collection software . . . at no cost, which many already do. [emphasis ours]

Interestingly, the Times finds the $1 million small seller exception—which we’ve seen little criticism of elsewhere—to be unfair to small bricks-and-mortar retailers. But they rightly point out that including the $1 million exception is a matter of political expedience:

Unfortunately, the bill exempts retailers who have under $1 million in Internet sales from the collection requirement. That perpetuates the problem, because a bricks-and-mortar retailer is not exempt based on total sales. As a political concession to win swift passage, however, the exemption is acceptable as long as lawmakers commit to continued efforts to level the playing field.

It’s great to see the New York Times speak out so forcefully and cogently in favor of sales tax fairness. Given last Friday’s vote of 75-24 in support of the Marketplace Fairness Act, it seems most members of Congress agree!

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Senate votes to support Marketplace Fairness Act, 75-24

March 27, 2013

On Friday, the Senate debated the merits of online sales tax and the Marketplace Fairness Act. The debate was thrilling, and we are proud to provide (courtesy of C-SPAN) a complete stream of the 42-minute debate right here.

After the debate, the Senate voted overwhelmingly to support the amendment to the Senate’s 2014 budget resolution. The final vote was 75-24.

So what’s next for the bill? Your guess is as good as ours, but we trust Congress can finally get this done.

Also, for those of you who are as geeky about this topic as we are, here’s the full 63-minute “pre-debate” that occurred one day earlier, on March 21st.

Senate Debate March 21, 2013

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Small sellers: What does $1 million in sales look like?

March 19, 2013

There has been a lot of talk lately about the “small seller exception” in the Marketplace Fairness Act, which was introduced last month. The bill says that small sellers don’t have to collect sales tax on online purchases, and it defines “small seller” as a merchant with less than $1 million in annual remote sales.

Some opponents say this threshold is still too low, though—that a seller with $1 million in annual remote sales is too small to handle sales tax.

So, what does a seller making $1 million in remote sales look like? Here a few examples.

Bottled Water

You wold have to sell 166,000 cases of water per yearLet’s say an online retailer is selling 0.5-liter bottles of water in cases of 24. At $6 per case, $1 million is equal to 166,667 cases of bottled water, enough to fill 125 fifty-three-foot tractor-trailer trucks.* That means that if you were selling $1 million worth of bottled water in a year to out-of-state buyers, then you would shipping out an entire truck of full of bottled water approximately every three days.

125 trucks

Shoes

ShoesAssuming the average price of shoes is $50 per pair, $1 million is equal to 20,000 pairs of shoes. To make $1 million selling shoes in one year to out-of-state buyers, you’d need to sell about 55 pairs of shoes per day, every day, for an entire year.55 Pairs of Shoes sold each day

Digital Goods

Angry Birds Star Wars AppMany apps go for about $1 each, so to earn $1 million selling apps, you need to sell at least 1 million apps. To sell 1 million apps in a single year, you’d have to sell 2,739 per day to out-of-state buyers, or slightly less than 2 per minute, every minute, for an entire year.

Conclusion

Any business selling at these volumes must be using some sort of e-commerce platform or order management system, and these systems can be easily updated to provide access to free sales tax management services.

truck*A 53-foot tractor-trailer has approximately 4,000 cubic feet of carrying capacity, with a maximum cargo weight of approximately 50,000 pounds.

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