By now, you’ve probably heard at least some sort of reference made to the “The Marketplace Fairness Act (MFA)”. Maybe it was in conversation with another business, or you overheard it mentioned by someone talking about what they heard on the news, or maybe you just saw it mentioned here a time or two. But what is the MFA and what does it mean for ecommerce businesses now and in the future? Generally speaking, the MFA would allow states to require out-of-state retailers to collect sales tax if (and only if) the state simplifies its sales tax system.
A federal solution of some kind is needed to help eliminate the various inconsistencies amongst states and how they choose to define nexus and to eliminate the overwhelming amount of contrasting tax rules between items of an identical nature. Simplifying the tax system to reduce compliance burdens would not only help improve compliance, but would also help to improve the economy as a whole by reducing the tax related burdens on businesses. MFA is the current version to implement some sort of federal solution.
In 2013, the U.S. Senate voted to approve the MFA. Since then the bill has remained dormant in the U.S. House of Representatives. Instead of addressing MFA in it’s current condition, the House’s Judiciary Committee challenged “experts” in the field to provide more suitable alternatives to the MFA approach. We have written about a number of those approaches including: Home Rule and Revenue Return, a Consumer Private Reporting System approach, and of course, Simplification. While other approaches have been sought, none have gained as much traction as the MFA.
Currently, remote retailers are required to collect sales taxes in states where they have a “minimum connection” or nexus. Historically, nexus has been based on some sort of physical connection to a state, either through employees or property being located within a state. This geographic limitation has continued to come under increased pressure due to the growing size of the ecommerce industry. A growing number of states are ignoring constitutional restrictions by demanding retailers collect sales and use taxes when their connection to the state is, at best, flimsy.
Keeping the sales tax up-to-date with ecommerce and developing technologies is important for states, but changes have lagged behind. More importantly, making multistate sales tax collection as simple and consistent as possible is important for ecommerce retailers and the national economy as a whole. The MFA approach, which would give states some limited additional authority to collect existing taxes as long as they adopt relevant simplifications to their sales tax system, attempts to strike the right balance. However, major gaps still exist in the current MFA draft.
The MFA bill draft could be improved from its current state to achieve two more very important goals: to define the limits of state tax authority in order to prevent uncertainty and harm to interstate commerce, and to simplify the tax system to such a degree that online sellers do not face excessive and inequitable compliance burdens. This last goal has been coined “Tech Neutrality”.
The MFA consists of six sections:
- Section 1 is a description of the purpose of the bill and an outline of general terminology.
- Section 2 authorizes states belonging to the Streamlined Sales and Use Tax Agreement to require sellers to collect and remit sales tax on remote sales beginning 180 days after enactment. States that do not belong to SSUTA would also be allowed to require sellers to collect and remit sales tax on remote sales if they enacted legislation to include each of the following:
- Specify the tax and products and services subject to it.
- Provide a single entity in the state responsible for all sales tax administration, return processing, and audits; a single audit of a remote seller for all sales tax jurisdictions in the state; and a single sales and use tax return to be filed with the state’s single entity. Local jurisdictions may not require remote sellers to submit returns or collect tax beyond that required by the single state entity.
- Provide a uniform sales and use tax base among the state and local taxing jurisdictions.
- Source remote sales according to the method provided (delivery location, then billing address, then seller address).
- Provide a database indicating taxability of products and services, including exemptions, rates, and boundaries plus the availability of free software that would calculate tax on each transaction.
- Waive liability (including penalties and interest) for remote sellers and software providers who incorrectly collect, remit, or non-collect sales and use tax if they rely on information or software provided by the state.
- Provide 90 days’ notice of any sales tax rate changes and waive collection liability for 90 days if notice is not provided.
- Section 3 states that the Act should not be interpreted as a means to expand state authority over any tax except sales and use taxes, it would not alter the determination of nexus according to established standards, it would not limit a seller’s authority to choose tax software, it would not alter a state’s powers to regulate or license businesses, and it would not encourage states to impose new taxes.
- Section 4 defines the various terms, including the sourcing rule.
- Section 5 allows the Act to be severed if parts are held unconstitutional.
- Section 6 indicates that the Act does not preempt or limit state powers except as provided.
Currently, Section 2 also includes a “small seller” (or de minimis) exception, which would exempt sellers from these obligations if the seller has total remote sales of less than $1 million, however, this provision has garnered some negative commentary and may be removed in future versions of the bill.
One of the largest concerns to implementing the MFA is that the burden is placed on retailers and not on consumers. All states with a sales tax also have laws in place for a use tax. Many opponents argue that states should be relying on the laws they already have in place instead of hoping that new legislation would allow for collecting the increasing amount of uncollected taxes. There is no evidence that approval and implementation of the MFA would allow for these taxes to be collected, but there is an impending sense of something needing to change.
The MFA isn’t the only option for change, but it is the only one that has been around long enough to potentially pass. With Congress coming back from recess in a few weeks and the looming deadline of the Internet Tax Freedom Act, the atmosphere is ripe for changes to be made.