The Marketplace Fairness Act: What You Need to Know

The proposed Marketplace Fairness Act requiring online sellers, no matter where they are located, to collect local tax on retail sales is gathering strong support in Congress and among retailers.

The law affects not just big companies like Amazon but small businesses including affiliate marketers for Amazon and other online retailers, says Geno Prussakov of the Affiliate Marketing Blog.

What the Marketplace Fairness Act Says

According to attorney Robert W. Wood, an expert on taxation, the proposed legislation offers a simplified means for the 45 states and 7,600 local sales tax systems nationwide to compel online or catalog retailers called “remote sellers” to pay local tax.

A 2002 U.S. Supreme Court ruling in Quill vs. North Dakota held that states can require remote retailers to collect sales tax from customers only if the retailer has a presence in the state.

However, brick and mortar retailers who consider the lack of sales tax on many online sales an unfair competitive advantage continued to lobby for change.

The Amazon Tax

Nine states further complicated the issue recently by passing so-called “affiliate nexus taxes” also sometimes called the “Amazon tax.” These states include Arkansas, California, Connecticut, Georgia, Illinois, New York, North Carolina, Pennsylvania, and Rhode Island, with other states reportedly considering similar measures.

The tax requires any remote retailers with annual sales in the state exceeding $10,000 a year to collect tax if the sales were referred by an affiliate living in the same state.

In many cases, remote retailers have chosen to simply terminate relationships with affiliates in nexus law states, a measure so-far affecting about 75,000 small businesses, Prussakov estimates.

What Others Think

From the perspective of affiliate marketers like Prussakov, the new law, if passed, will be a good thing since it requires remote retailers to collect sales tax, where appropriate, at the time of the transaction just as local retailers do.

Amazon is also apparently now behind the law, which requires states to first simplify their own tax codes to make compliance easier for remote retailers.

Prussakov says the law essentially takes affiliate businesses out of the equation by making it irrelevant where sales referrals originate.  However, others are concerned the law will still adversely affect small businesses that do retail online.

Despite another caveat in the bill exempting businesses with less than $1 million in annual remote sales from compliance, Ebay, the online auction company that works with small online sellers, is still concerned that small businesses will be hurt, reports Chris Morran of Consumerist.