There is no question that the Internet has changed the business landscape and has significantly lowered traditionally high barriers to entry in some industries. No longer do startups and entrepreneurs need to have large amounts of capital to get started. Depending on the industry, getting started may be as simple as having a reliable Internet connection and a basic website selling your product or service. Currently, Internet-based retailers enjoy the benefit of not being required to charge sales tax in states where they do not have an actual physical presence.

That all may change soon, however. The Marketplace Fairness Act is currently pending in both houses of Congress, and would give states the power to collect sales tax from all online business that sell products to their residents. Part of the reason that states were unable to collect from online businesses up until now was judicial concern that allowing states to collect from businesses that did not have a presence in the state would unreasonably burden commerce. According to proponents of the bill, technological advancements have made it more feasible for retailers to collect state sales tax at the time of a transaction. According to a report in the Wall Street Journal, the bill has broad bipartisan support as well as the support of most large retailers, including Amazon and Wal-Mart. Notably, online retailing giant eBay has voiced vocal opposition to the bill, saying that it will hurt small online sellers, a group that makes up the majority of eBay’s customer base.

The act requires states to simplify their tax laws in order to simplify the process of tax collection for businesses. States that want to collect taxes from online retailers have two options to simplify their tax codes:

  • Option 1 – States that have not already may adopt the Streamlined Sales and Use Tax Agreement (SSUTA) that 24 states already use.
  • Option 2 – States that do not adopt the SSUTA may alternatively meet 5 simplification criteria set forth in the act: notify retailers ahead of time of any rate changes, designate a single state agency to handle tax registrations, filings, and audits, create a uniform sales tax base for use throughout the state, employ destination based tax rates, and provide retailers free software to comply with state tax laws, and not hold retailers liable for any errors resulting from using state provided systems or data.

Fortunately for small businesses, the Marketplace Fairness Act provides an exemption for businesses that have less than $1 million in annual revenue. This measure gives smaller retailers a slight advantage over their larger competitors, and also ensures that small business is not overburdened by complicated tax collection requirements.

Contact a small business attorney for a consultation

The Marketplace Fairness Act has the potential to significantly alter the e-commerce landscape, and may have substantial tax implications for growing businesses. Small business owners and entrepreneurs should take time to understand the implications of the proposed law, and also consult with an attorney to determine whether their business will be affected, and also how to comply with the regulations should they become law.

- Claire Kalia


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