The Marketplace Fairness Act imposes a federal tax on e-commerce transactions

By May 13, 2013

On May 6th the US Senate voted in favor of the Marketplace Fairness Act, a piece of legislation that would require sales tax to be collected on goods purchased via major e-commerce websites, thus standardizing and evening-up the rules in this area.


The rapid expansion of all forms of e-commerce has intensified calls for legislation to level the playing-field between online sellers and bricks-and-mortar stores. Back in 1992 the United States Supreme Court ruled in the Quill Corp. v. North Dakota case that e-commerce sites were under no obligation to collect state sales taxes from customers resident in a particular state unless the online seller actually had a physical setup within that state’s borders. Currently, the obligation lies with customers living in the states where sales tax is applicable to report their online purchases as part of their annual tax declaration. However, very few of them do so, and this represents an annual loss of public revenue estimated at $11 billion. On 6 May the US Senate took a step towards clarifying the rules when it voted in favor of the Marketplace Fairness Act, which is intended to standardize tax rules on e-commerce and also remedy a situation which is thought to be undermining the business of bricks-and-mortar stores.

Taxing online sales…

The Marketplace Fairness Act, aka the ‘Internet Sales Tax’, received strong backing from the US senators, who on 6 May voted 69 to 27 in favor. The new law, if supported by the House of Representatives, will impose a federal tax on transactions on all e-commerce sites that register more than $1 million in annual Internet sales. The tax will be collected directly from the Internet sellers, no matter where the buyer making the purchase is located. For several years now, various, rather haphazard, attempts on a state-by-state basis have been made to regulate e-commerce. The fact is that very few e-commerce website owners take any notice of the rules. In California, for example, only 1.4% of all online transactions comply with the regulations in force. This new bill therefore aims to standardize the rules across the US, making sales taxation both fairer for all parties involved and more efficient.

…and dampening the boom of ‘showrooming’

Among other stated aims is the desire to limit the impact of showrooming, a practice whereby consumers use their mobile devices to check out physical stores they can visit to compare items they might wish to buy, and then go away and purchase them more cheaply online. This growing practice is seen as potentially undermining the future of the main street store. However, the Act targets only major e-commerce sites and will not affect the development of smaller or newer sites which are trying to make their mark.  A number of industry giants, including Amazon and Ebay, which would be directly affected by the new legislation, have publicly expressed differing views. While Ebay would like to see major amendments to the Act, Amazon has come out in agreement with the legislation. With the growth of same-day delivery, Amazon has been expanding its physical depots and warehouses in many states where it already pays sales tax. The next stage of the lawmaking process sees the Act debated and voted on in the House of Representatives.


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