California’s E-Fairness Law Will Be More Effective If the Marketplace Fairness Act is Passed

By Hector Barreto

Last fall, California’s e-fairness law went into effect.   It successfully closed a decades-old tax loophole that had allowed online sellers to avoid collecting sales tax, which created a significant price advantage at the direct expense of the brick-and-mortar stores in our communities.  Although it’s unclear the law’s effectiveness so far, many small-business owners in California I’ve talked to say they are already feeling the positive impact.

Even so, we now have an opportunity to pass a national e-fairness law in Congress, which is called the Marketplace Fairness Act.  This legislation passed in the U.S. Senate a few weeks ago by a vote of 69-27 with strong bipartisan support, but it faces a tough fight in the House of Representatives.  So it needs and deserves the votes of California’s Congressional delegation.

Naturally, many folks are asking why a federal law is needed if we already have a state e-fairness law.  The answer is simple:  To create a level playing field nationwide so merchants in California and other states with e-fairness laws aren’t put at an unfair disadvantage.  Even with our current e-fairness law in place, consumers living near a state border or shopping in cyberspace may exploit tax loopholes by making purchases in states without e-fairness.   

The Marketplace Fairness Act does not create a new tax, and not a penny of sales taxes collected online will go to the federal government.  However, enacting federal legislation would create a truly level playing field nationwide by streamlining the entire sales tax collection process and establishing a uniform tax base.  More importantly, it reinforces free market principles by preventing the government from picking the winners and losers by selectively enforcing tax laws.

Some say abiding by all of the state and local tax codes is too much of a burden on the online seller.  That may have been true several years ago, but with modern software—which is provided to online retailers for free under the Marketplace Fairness Act—collecting and remitting sales tax is basically automatic.  Using the software even relieves the sellers of liability due to error by the certified software provider.

For California, this could really be a watershed moment in the state’s economic history.  The state’s government, which has had notorious fiscal problems for years now, stands to recover more than 4.1 billion in uncollected sales tax revenue.  Given Governor Brown’s recent move toward austerity measures, these funds will be welcome to close budget gaps and perhaps even cut taxes one day.

Meanwhile, thousands of small businesses will finally be able to compete fairly in the 21st Century economy.  California has over 1.5 million retail jobs, and those jobs will be more secure if complementary e-fairness legislation is passed.

There is deep and broad support for this legislation across the country, but it’s up to Congress to make the change.  Those of us in California’s business community will be keeping an anxious eye on Washington.  The Marketplace Fairness Act is essential to keeping California—and America—well positioned for economic growth for many years to come.

Hector Barreto, the former Small Business Administration Administrator under President George W. Bush, is the author of “The Engine of America,” which provides motivation and inspiration through the stories and ideas of business leaders across the nation.

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