MANILA, May 15, 2013 — The Marketplace Fairness Act of 2013 (MFA), otherwise known as the “Internet Sales Tax” easily sailed through the U.S. Senate last week with a vote of 69-7 in favor of the measure. Co-sponsored by Democrats and Republicans alike, it was both embraced and bashed by many. This bill aims to promote fairness and equal opportunity for the states and retailers.
Forty-six years in the making.
There is a rich legal history behind this bill that dates back to 1967, starting with the National Bellas Hess V. Illinois Department of Revenue case. National Bellas Hess was a mail order business founded early in the last century and located in Missouri and incorporated in Delaware. Their process of buying and selling merchandise relied on orders they received from mailing product catalogues across the United States, almost like online retailing today.
When the lawsuit arose, product orders, as had been traditional, were sent to Missouri where the goods originated. The State of Illinois then tried to collect sales tax from goods the company sold to residents of Illinois. But, as a result of an eventual U.S. Supreme Court ruling against them, they were unable to enforce their sales tax on the grounds that Bellas Hess didn’t have a physical presence in that state.
A similar situation arose in 1992 with North Dakota filing a case against Quill Corporation. Quill, an office supply company—located, incidentally, in Illinois—did not have a physical retail presence in North Dakota, but fulfilled orders there from its Illinois location. Again, the Supreme Court ruled against the state—this time North Dakota—applying the same reasoning it used in the similar 1967 case. But this 1992 case served as an inspiration for the creation of the Marketplace Fairness Act, since the Court indicated that Congress could disagree with their decision.
What MFA is all about.
MFA aims to be the solution to the loophole used earlier by National Bella Hess and Quill Corporation and employed today by online retailers such as Amazon.com. A post from Consulting Firm BackTaxesHelp says that the MFA aims to resolve issues that current laws and provisions leave largely unanswered. Currently, Internet sale taxes can only be gathered if both parties (buyers and sellers) are transacting business in the same state where the customer resides and where the retailer has a physical presence, or “nexus.”
In the new Senate bill, the legal loophole through which Internet retailers can generally exempt themselves from state taxes would be closed. Online sellers would have to collect individual state taxes even if their buyer resides in a different state from the company’s retail presence.
Negatively affected by this bill are remote and online sellers who are grossing more than a million dollars per year. (Businesses smaller than that size would be exempt.) If this bill is also passed by the House and signed by the president, it could potentially raise state revenues from between $12 billion to $24 billion annually according to some estimates.
Who wants the bill to become law?
Two states are already looking forward to using the revenue enabled by this bill to fund their projects. Maryland hopes to offset their increasing gas taxes while Virginia just had a transportation bill approved, so they would be delighted to start collecting these taxes immediately. But these states aren’t the only ones eager to book extra tax revenues. Those states already counting on the revenue should this bill become law would likely raise individual tax rates otherwise, or so they claim.
Is this tax a problem, or not?
For consumers and big online retailers, the new tax could prove to be a huge blow to disposable incomes, already under continuous stress since 2008. Currently, online consumers in most cases can purchase products on the Internet nearly always at lower prices, if only because many of them are able to make these purchases tax-free. The largely tax-free nature of online retailing is one of the greatest attractions for purchasing goods in this manner.
On the other hand, states remain eager to increase tax revenues. The revenue they could book from online retailing could help fund their local projects while, technically at least, not requiring them to raise taxes on their own residents. Meanwhile, brick-and-mortar companies and businesses that have complained for years about the unfair competitive advantages of online retailing due to the current effective tax exemption on their sales, would likely feel vindicated, rejoicing in having achieved a “level playing field” at last.
Retailers are also understandably looking forward to eliminating the currently common consumer practice of “showrooming,” in which they test out a physical product in a brick-and-mortar store but then return home to their computers to complete the sale with an online retailer that doesn’t need to maintain the expense of retail space.
If you are planning on indulging in a last-minute online buying frenzy, you don’t have to worry about this just yet. The Senate bill still has a long way to go before it gets implemented. October 1, 2013 would be the earliest the new law could go into effect even if the House eventually says yes. Additionally, states would have to amend their tax laws before they could implement the bill locally.
However, unlike in the Senate where this proposed law breezed through without serious opposition, it will likely face much tougher scrutiny in the House. So the best thing consumers can do right now, depending on their individual points of view on this issue, would be to let their Representative know just what they think of this proposed new law.
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