Understanding the Marketplace Fairness Act on US taxation

The US senate has passed the “Marketplace Fairness Act” in order to to simplify the tax structure in the US.

Taxation in the United States is extremely fragmented. Each state has its own regulated tax structure, and price of tax can vary from product to product and even county to county. The United States has over 9,600 different variations of sales and use taxes across all 45 states that collect said taxes.

For brick and mortar establishments, calculating local tax is fairly easy and it is collected upon purchase. For remote sellers, such as Ecommerce sites and catalogs, the ability to calculate all of the 9,600+ different tax variations is simply not a possibility; this is why the US government left the declaration and payment up to the consumer. As expected the amount of customers who declare and pay their taxes for remote sales is very low. 2012 saw over $23 billion in un-collected taxes from remote sales.

Following court cases from 1962 and 1992, regarding sales collection from remote merchants, as well as catalog and mail order merchants, the Supreme Court came to the conclusion that sales taxes would only be collected by retailers who have a physical presence in the state. With the rise of Ecommerce sales, these remote merchants grew, resulting in more lost taxes.

In May of this year the “Marketplace Fairness Act” was passed by the US senate. The bill proposes a unified and simplified tax structure to be adopted by participating states, so tax can be collected evenly from remote merchants. Currently 23 out of the 45 states that collect sales tax are part of the Marketplace Fairness Act, and are part of the Streamlined Sales and Use Tax Agreement (SSUTA).

Implementing an infrastructure that can calculate the simplified taxes, collect them, and transfer them to the correct state department is no easy task. For this reason, small businesses with yearly remote sales of under $1 million are exempt from charging sales tax.

Although the bill was passed, it has not been legislated yet. Once enacted, all non-exempt remote online retailers in the United States will be required to collect sales tax on every transaction from the 23 SSUTA states.

SSUTA states include: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, N. Carolina, N. Dakota, Ohio, Oklahoma, S. Dakota, Utah, Washington, Vermont, W. Virginia, Wisconsin, Wyoming and Rhode Island.

For years, uncollected sales tax was a sort of “incentive” in placing online purchases. Experts believe that once taxes will be collected from US remote merchants, US citizens will be more opened to the Far East and Europe for online goods, rather than purchasing almost solely from local US retailers.

Image courtesy of Wikipedia