The U.S. Senate is set to debate and vote on the Marketplace Fairness Act in Washington this evening.
If it passes, the Marketplace Fairness Act, or MFA for short, will require all online vendors with over $1 million in annual online revenue to pay state and local taxes to the governments that their purchasers reside in. Online sales taxes are already technically required, but are rarely enforced.
A 1992 Supreme Court ruling says that vendors do not have to pay state and local taxes unless they have a physical presence in their customer’s state. Instead, customers are supposed to report their purchases to state and local governments for taxation. But this requirement is rarely enforced due to the 1998 Internet Tax Freedom Act.
Not surprisingly, the overwhelming majority of online purchases go untaxed. In California, for example, it is estimated that only 1.4% of online sales taxes are paid. In the age of digital commerce, this means large amounts of lost tax revenue. The National Conference of State Legislatures estimates that states collectively lost $23.3 billion in 2012 tax revenues because of online sales.
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Proponents of the MFA say the bill is a common sense fix to this revenue loss.
Michael Mazerov of the Center on Budget and Policy Priorities says the MFA will level a currently un-even playing field between online and in-store vendors. “Sales taxes typically range from 5 to 10 percent, so local businesses start out at a 5 to 10 percent price disadvantage compared to Internet retailers that don’t collect taxes,” he said.
The bill is not without its opponents, however.
Many claim the bill will place an unfair burden on small business to properly pay taxes to America’s estimated 9,600 different state and local tax jurisdictions. In addition, opponents say the bill favors large online vendors like Amazon and Wal-Mart that can afford to sort out different local tax codes while suppressing smaller businesses that cannot.
eBay is openly campaigning against the bill, saying the current $1 million threshold that would make a business exempt from the MFA should be raised to $10 million.
The bill passed 75-24 in the Senate in March during a non-binding preliminary vote. Today’s expected vote would be a cloture vote, meaning that if the bill receives 60 votes it will be exempt from the possibility of a filibuster during a later final vote. If the bill passes the cloture vote, Senators will likely hold a final vote directly afterwards.
Based on March’s vote, the bill appears likely to pass in the Senate. If the bill passes in Senate today it will move to the House of Representatives. From there, it will be interesting to see how the MFA does. Ninety-five percent of House Republicans have signed a “Taxpayer Protection Pledge” vowing to vote against any legislative measure that would introduce new taxes. Given the bipartisan support the bill is receiving in the Senate, these house representatives may be under pressure to provide an exemption to their pledge.