Ever since businesses figured out how to sell their products on the Internet the government has struggled to find a way to tax them, and they’re getting close. The Marketplace Fairness Act was re-introduced to Congress yesterday after a group of 53 senators and representatives spent a year improving it. The bill was originally shot down in 2012, but the new changes are finding favor with republicans and democrats alike.
The Marketplace Fairness Act sets regulations for states to begin taxing online-only businesses. Online businesses will only pay taxes in the states that they are physically based in. The tax will only affect sales to states where the business doesn’t have a “nexus” or a physical presence.
For example, an online retailer with offices in Georgia that sells to states all over the country will add a sales tax to their products in line with the Georgia tax rate. The tax won’t apply to their products sold in Georgia but will apply to products sold in all other states.
Naturally, there are exceptions and limitations. States that don’t have a sales tax (Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon) aren’t able to suddenly start charging a sales tax to online businesses. Also, the tax doesn’t apply to online stores who make less than $1 million dollars annually. That number is actually the biggest improvement this bill has made over the year. When it was introduced in 2012, it only exempted businesses making less than $500,000.
The Marketplace Fairness Act has two main benefits. First, it helps local brick and mortar businesses that are at a disadvantage against large online retailers. Consumers spend 5-10% less for online products depending on the state’s tax rate because they don’t have an added sales tax. The larger benefit is to government budgets. States depend on sales taxes for 20% of their revenue. This tax would increase revenue to state governments without their having to increase the tax rate or impose more taxes on residents.
So far, the bill has received bipartisan approval. Republicans support the tax because the increased revenue will help balance the budget while Democrats support the assistance the bill provides to small businesses. The opponents of the bill are anti-tax groups and those against taxing large businesses and the upper class. Their argument is that taxes punish success and discourages companies from increasing their revenues over $1 million.
For marketers who’s products and services are entirely online, this tax was a long time coming. Companies with revenues under $1 million shouldn’t be affected if the Marketplace Fairness Act passes, but large companies would have to adjust and start adding a tax to their consumer’s purchasing process.