The Marketplace Fairness Act: What All SMBs (Not Just Internet Retailers) Need to Know

On May 6th, the U.S. Senate passed the Marketplace Fairness Act of 2013 (S. 743) by a majority vote of 69 to 27. Suddenly, everyone is talking about it - and with good reason – this is the furthest any federal internet tax bill has progressed in the past decade! That’s right, this isn’t the first time federal “internet sales tax” legislation has been introduced.

Now I’ve been covering federal internet sales tax developments for the past three years. Incidentally, the first internet sales tax post I ever wrote was for AllBusiness.com way back in July of 2010, (two Congresses ago) shortly after a federal Main Street Fairness proposal was introduced. (See, “The Main Street Fairness Act: Explaining Internet Sales Taxes”, AllBusiness.com, July 24, 2010)  That 2010 proposal went nowhere. Then in 2011, federal internet sales tax legislation was introduced again! This time there were three separate proposals – all which died before the end of the 112^th Congressional session. (I covered these proposals in my prior AllBusiness.com posts “?”, 8/22/11, and "", 1/3/12)  So the fact that one chamber of Congress actually passed a federal internet sales tax bill  is significant!

And while the news reports have been rampant and you may think you’ve heard it all – I have to ask “what do you know really do know about Senate Bill, 743, The Marketplace Fairness Act of 2013?”

That it will only impact internet retailers? That it will only impact “Amazonian” sized businesses?

So in my post today, I won’t give you another high-level summary, nor will I be overly opinionated as to whether the new legislation is “right” or “wrong”. (There’s enough of that going around!)  What I will do is give you a plain English explanation of what the Marketplace Fairness Act of 2013 says and how it will impact Small-Medium sized businesses. (And not just internet retailers!)

What The Marketplace Fairness Act Requires States to Do

The Marketplace Fairness Act ("MFA 2013") will grant something called “collection authority” to states that are either full-members of the Streamlined Sales and Use Tax Agreement ("SSUTA"), or to non-SSUTA states that simplify their sales tax collection and administration systems according to the requirements laid out in the bill.  Collection authority simply means that states will have the power or authority to require “remote sellers” to collect sales tax on sales to purchasers in their state. Certain sellers, primarily those that meet the proposal’s “small-seller” definition, will be exempt from collecting sales tax under the MFA 2013.

Now I’ve thrown out a lot of (very important) terms here - like “remote seller” and “Streamlined Sales and Use Tax” and “small-seller” – terms which I’ll cover as we go long. But first here’s some of what the MFA 2013 will require that states provide and implement before they’re entitled to collection authority.

• A single state-level entity to oversee the state’s sales and use tax administration.
• A single audit for the state’s state and local taxing jurisdictions within the state.
• A single sales and use tax return that “remote sellers” will use to file their returns with the state’s administration entity. (States also can’t require “remote sellers” to file more frequently than non-remote sellers.)
• Free software for remote sellers that calculates the sales tax due on each transaction at the time the transaction is complete, reflects tax rate changes and is capable of filing all sales tax returns. (Note, when the MFA 2013, S. 743, was introduced on 4/16, it simply said that states had to provide free software to remote sellers. But before the bill was passed, the bill's language was changed to say a remote seller isn’t required to use the free software provided by the state.  The bill doesn’t say whether the state will be required to pay for a different software product chosen by the remote seller.)
• Certification procedures for Certified Service Providers or “CSPs” (sales tax software vendors).  States must require that the software provided by CSPs be capable of calculating and filing sales and use tax returns in every state that qualifies for collection authority under the MFA 2013.
• A 90 day notice of tax rate (but not tax base) changes.
• Relief from liability provisions which essentially say that if a CSP or a remote seller receives incorrect information from the state or the state doesn’t provide the required 90-day notice of a tax rate change, then the CSP or the remote seller is relieved from the liability that results if tax was collected at the wrong rate or not collected at all.  Also, CSPs and remote sellers are relieved of tax liability if either one gives the other inaccurate information.
• The MFA 2013 also requires states to follow some specific sourcing rules which determine which state gets the sales tax collected from a specific sale. In general, the state where the customer receives the purchased goods (the "ship to" address) is the state that's entitled to the tax collected.

Are You a “Remote Seller”?

Under the MFA 2013, remote sellers will be required to collect sales tax in states with collection authority. But here’s something that might come as a real shock!  The Marketplace Fairness Act of 2013 does not use the words “on-line”, “internet”, or “web” when describing a remote seller.  The definition of a “remote seller” is very broad!  The MFA 2013 simply says that a remote seller is a person or entity that would not be required to collect sales tax in a state if it weren’t for the MFA 2013!  This is simply another way saying is that a remote seller is a seller that doesn’t already have “nexus” to a state.  “Nexus” is the term that describes the "connection" that must exist before a state can impose its tax obligations on out-of-state businesses.  You’ll often read that having nexus means having a physical presence in a state, like a sales office, or employees.  But states are getting very aggressive on what a “physical presence” looks like and some, such as those with “Amazon Laws”, say that having a web-link or banner that sits on the website of a resident or a company that is based in the state is the same as a physical presence if those residents or businesses are paid when a completed sale originates from that web-link. (See my prior AllBusiness.com post, “” for more on nexus.)

Because the definition of remote seller is very broad, this means that any business – even a brick-and-mortar business – that makes sales into states into which it doesn't have sales tax nexus is considered a “remote seller” that would have to collect sales tax if those out-of-state sales are to customers in states that adopt the MFA 2013!  A remote seller could very well also be a company making B2B sales, such as an equipment manufacturer that makes sales to businesses in MFA states.  The point is that the Marketplace Fairness Act’s impact is not  limited to “internet only” retailers.

The “Small Seller” Exception

Some remote sellers may be exempt from collection tax under the MFA 2013.  Another requirement in the bill is that states must exempt remote sellers that meet the MFA 2013's “small-seller” definition. Under the MFA 2013, remote sellers whose total annual U.S. remote gross receipts in the preceding calendar year were $1,000,000 or less qualify as an exempt small seller.  However, remote sellers are required to include the sales of related businesses, such as subsidiaries that are owned by the same parent company, when determining if they meet the small seller exception. Keep in mind that the $1 Million threshold is a total figure, not a state-by-state threshold.  This means that a seller whose remote sales exceed $1 Million would have to collect in every state that qualifies for collection authority under the MFA 2013 even if sales to a specific state were extremely small.  Take, for example, a seller whose remote sales exceed $1 Million.  Now assume that the seller's remote sales include a one-time $50 sale to a state with collection authority.  Technically, the non-exempt remote seller would be required to collect sales tax on that one $50 sale.

If the Marketplace Fairness Act of 2013 Becomes Final Law, When Will It Be Effective

States that are not members of the SSUTA but that meet and implement all of the MFA 2013’s requirements would be able to exercise their collection authority no earlier than the first day of the calendar quarter that is at least 6 months after the State enacts legislation to implement the requirements. Unlike the SSUTA states which have already simplified their sales and use tax administration (as required by the SSUTA), the non-SSUTA states would need to essentially start from scratch.  So for non-SSUTA states, the MFA 2013 would first need to become final law, then each individual state would need to enact it’s own state law that would say the state is going to comply with the MFA 2013, then the state would need to actually put all the requirements in place. So the actual effective date in any specific non-SSUTA state would really depend on how quickly the state follows-through on all of the requirements.

Final Thoughts