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Online Sales Tax: What E-Commerce Merchants Should Know about the Marketplace Fairness Act

It’s been all over the news and you’re wondering: how is the Marketplace Fairness Act, a bill passed by the Senate and if passed by the House of Representatives will require online businesses to collect sales taxes, going to affect my online business? What does the bill really entail? What does it all mean?

Today we’ll cover the basics e-commerce merchants should know about the online sales tax.

What is The Marketplace Fairness Act of 2013?

The United States saw over $50 Billion in online sales in the first quarter of 2013 and there is no denying that e-commerce sales will continue to rise as technology advances. As a result, brick-and-mortar stores are suffering and counting on the government to level the playing field; which leads us to the Marketplace Fairness Act. The bill is designed to create a fair marketplace for offline retailers and consequently create extra revenues for state and local governments. Although the bill is not mandatory for all states, each state can pass legislation conforming to the Steamlined Sales and Use Tax Agreement and it is likely that states will as it will result in more tax money to balance their budget sheets. To date, 24 states have passed the conforming legislation.

Today e-commerce businesses are only required to collect taxes from online sales if they have a physical presence within the state such as a warehouse, store or call center. If a customer does not pay sales tax for an online purchase, they are responsible for paying Use Tax on these items which is commonly ignored during tax filing season.

As the Marketplace Fairness Act reads now, it would require online merchants with over $1 Million in annual sales to collect and pay sales taxes to the customer’s state, even in states where the business does not have a physical presence. The bill also requires states to simplify tax collection and offer free tax collection software.

[Image courtesy of NetworkSolutions]

What Will Merchants Need to Do?

The Marketplace Fairness Act is pretty straightforward but as a merchant, what should you be thinking about right now?

  • Use a tax collection software certified by SST (Streamlined Sales Tax Governing Board) There are currently 6 companies that are certified by the SST:
    • AccurateTax
    • Avalara
    • CCH
    • Exactor
    • FedTax
    • Taxware

    Good news for PrestaShop users! Avalara is already native in the PrestaShop software and available in the Addons Marketplace for free.

  • Implement a system to carefully monitor all aspects of accounting to ensure funds are set aside to make timely payments, manage tax collections by state and ensure small business aspects run smoothly such as product returns with tax refunds.
  • Strategize at an early stage. Analyze how taxes will affect your competitiveness in the market and what you can do to ensure you’re on top. You may want to consider implementing Free Shipping and other promotions to balance out the impact of sales tax. In case you haven’t read it yet, my recent blog post is a good starting point: 5 Easy Ways to Increase your Ecommerce Cart Value

Now what?

The legislation passed the Senate on May 6th, 2013 following a 69-27 vote and is expected to face more opposition at the US House of Representatives. Currently, there is no set date for the bill to enter the US House. However, should the bill pass in the US House it will go to the White House for signature, where President Obama has already indicated that he is a proponent of MFA. What are your thoughts on the Marketplace Fairness Act 2013 and what strategies do you plan to implement for your online store should it pass?

Not yet a PrestaShop user? Build your store with the #1 Free and Open-source e-commerce software that puts merchants’ interests and success first. Download PrestaShop today!

  1. Author: mike

    Date: June 1, 2013 at 12:39 pm

    Luckily most of us do not exceed 1 million in sales and are exempt.

  2. I do not think these people know what they are doing as it is only logical if there is such a tax it should go to the state where it was purchased in which the retailers must charge their states sales tax regardless if it is online or not as a sale is a sale, period. In fact, the bill is foolishly created and I cannot believe they are solving a simple issue with a complex and confusing solution. I mean in general physical stores tax is based on the city and state they do business or are located, which should be no different online as the purchaser is still buying from the store and it is still located in their respective states. Just seems simpler to deal with and implement globally.

  3. Author: James

    Date: June 3, 2013 at 6:10 pm

    I think this bill is a disaster. There is already laws on the books to collect sales tax online. It’s called the use tax that you personally are supposed to report on your annual tax form. If you do not report this tax then that is an issue between you and the IRS. To go after the companies that are law abiding is asinine. This is a big business bill designs to stifle competition from from growing start ups that cannot afford to pay teams of experts to deal with the 9000+ jurisdictions it will have to report sales tax to. Also, this is a sweetheart deal to a group of software companies that will use this law to impose their product onto other business owners of all sizes. Not only that the states will have to subsidize the software to give to other companies that won’t pay for it. With many low margin online business start ups when you hit that million dollar revenue this could break a company. I don’t think congress has the power to enforce a state tax when there is no physical store there. This has already been decided by the supreme court in the early 90s and they will strike this law down should it pass. If they want to regulate sales tax at a national level they should pass an amendment, but until they do so,this bill is unconstitutional.

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