The U.S. Senate is poised to vote on the Marketplace Fairness Act -- an innocuously named piece of legislation which is actually an initiative to implement a nation-wide sales tax. Essentially, the MFA doesn't create a federal sales tax, but provides states with a uniform framework, better allowing states governments to enforce their own sales tax laws on transactions made across their borders.
The MFA calls upon states join the existing Streamlined Sales and Use Tax Agreement (pdf) or follow what are essentially five rules:
- Notify retailers in advance of any rate changes within the state
- Designate a single state organization to handle sales tax registrations, filings, and audits
- Establish a uniform sales tax base for use throughout the state
- Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there)
- Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data
For a long time, businesses have only been required to collect tax in states where they have a physical presence. Even then, the type of "physical presence" required for taxation has varied state by state, allowing companies like Amazon to wriggle past such laws. Slowly though, Internet companies have been required to pay sales tax in an increasing number of locations. And, interestingly enough, the MFA has Amazon's support.
Tested first by mail-order catalog services, it has long been argued that collecting sales tax on businesses operating outside of state lines would not be in line with interstate commerce laws. Additionally, it has been argued that such an endeavor would be prohibitively complex.
"The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle interstate business in a virtual welter of complicated obligations to local jurisdictions"
Source: Bella Hess v. Illinois (1967)
The MFA argues with the advent of computers and modern infrastructure, the burden of interstate businesses being required to collect sales tax for every state isn't really the burden it once was.
However, eBay CEO John Donohoe is a staunch opponent of the bill. He argues the move will hurt small businesses. The bill's proponents though argue that isn't the case -- about 99 percent of small businesses will be exempt, they claim. Small businesses which generate less than $1,000,000 in revenue will be exempt from collecting interstate sales tax.
The Marketplace Fairness Act could go up for a vote as soon as today.
