With Washington looking to sort things out post government shutdown, one of the most pressing issues facing the ecommerce industry resurfaces: major legislation that would require the collection of an internet sales tax.
For some historical context, state governments are strapped for cash and are looking for new revenues to help supplement their funding. Under current law, businesses are only required to collect sales tax in states where they have a physical presence. Instead, buyers are legally supposed to report the purchase on their own and pay a “use tax,” which the overwhelming majority of shoppers simply don’t do, meaning that taxes on out-of-state online purchases are never collected.
Mix the lack of state tax money with brick-and-mortar retailers thinking that their online counterparts have an unfair tax advantage, and you get our current situation: two sides debating whether or not online sales tax reform is merited. With all the debate, it can be difficult to parse out what the legislation of The Marketplace Fairness Act actually says. So to help you better understand what Senate Bill 336 means to you and your business, we’ve dissected and translated the bill’s contents into layman’s terms. (If you’d like to refer to the full bill at any time, you can access it via the above hyperlink.)
SECTION 1: SHORT TITLE.
This section simply explains that the bill will be commonly referred to as the Marketplace Fairness Act of 2013.
SECTION 2: AUTHORIZATION TO REQUIRE COLLECTION OF SALES AND USE TAXES Subsections (a) & (b)
Section 2 defines what states must do to gain the authority to collect online sales taxes. In the first part of this section, the bill says that any state that has already adopted the terms of the Streamlined Sales and Use Tax Agreement (SSUTA), an agreement that focuses on the simplification of tax codes to make interstate sales tax collection easier, can collect online sales. Alternatively, a state can agree that it will implement tax simplification measures, such as providing a uniform sales tax base and providing out-of-state retailers with free software to manage sales tax compliance.
There are also some protections in this big block of legal text, which do benefit you as an out-of-state seller, including:
- Out-of-state, or remote, sellers can’t be held liable for any mistakes in sales tax collection that’s caused by an error made by the government-approved software
- Remote sellers can’t be held liable for incorrect tax collections if the error is due to inaccurate information provided by the state
- The state must provide you as a remote seller with 90 days notice of a rate change
Subsection (c): Small Seller Exception
This is where you need to start paying attention, as these details have the most impact on your online business. The “small seller exception” means that online sellers with annual remote sales less than $1 million in the previous year are fully exempt from collection requirements detailed in this legislation. By remote sales, the bill is referring to any sales made in a state where you don’t have a physical presence. If your business is based in Texas, any sales made to customers outside of the state of Texas would be considered a “remote sale.”
SECTION 3: LIMITATIONS
This section provides some parameters to the bill – nothing that impacts your business, but is still good background information. These limitations mean that the bill:
- Only applies to “sales and use taxes,” and nothing else
- Doesn’t create nexus (in this case, a legal connection) between a person and specific state
- Doesn’t introduce any type of new tax on products that weren’t previously taxed before
- Doesn’t have an impact on sales that take place between a seller and customer of the same state
SECTIONS 4, 5 & 6: DEFINITIONS AND SPECIAL RULES, SEVERABILITY, PREEMPTION
These sections simply establish definitions for terms throughout the bill and include other general statements regarding severability and preemption.
The bill itself doesn’t speak to a lot of implications for your business, but that will change upon passage and implementation. The main takeaway is that if you earn less than $1 million in out-of-state sales, you have nothing to worry about. If you do pull in over $1 million in out-of-state revenue, upon passage, you’ll need to implement some sort of tax management software to help manage the calculation and collection of taxes from over 9,000 tax codes.
The passage of this legislation may take some time to play out because:
- Debate as to whether the $1 million threshold for exemption should be raised.
- As we enter the 2014 election cycle, members of an already-nervous House of Representatives might sit on the legislation to avoid controversy.
- There’s another version of the bill moving through the House, which means there will be compromise needed between the chambers.
- If and when the bill is turned into law, it will likely take states some time to meet all of the requirements to earn the authority to collect an online sales tax.
Right now, we’re in a game of sit and wait as we see what happens next – but at least, you have a true understanding of what The Marketplace Fairness Act is all about to help you prepare for what’s to come.
I am hopeful you will write a follow up piece regarding the benefits the Marketplace Fairness Act will provide every business owner. Everyone continues to be seized by the $1MM dollar small business exemption, and also continues to reiterate the archaic 1992 argument regarding compliance costs and burdens.
The truth is it is no longer 1992. Heck in 1992 no one knew what a smartphone was because it has not even been invented. So we kling to technological capabilities based on 1992 technological capabilities texting. emailing, mobile credit card processing and so many more technological advances we take for granted would be imposible.
The world today in 2013 is a much different place. Credit card processors using API Protocols easily exchange data with every e-commerce site on the planet making streamlined an efficient checkout processes available to everyone. Heck, e-commerce retailers using the same API protocols can easily establish real time shipping rates to over 40,000 different jurisdictions.
My point is simple. Today, modern technologies freely and easily enable and e-commerce business to seamlessly automate sales tax processing. That’s right, automate! Man shopping cart platforms and credit card processors have have already embedded such services in their checkout processes, and many more are in the process.
With the passage of the Marketplace Fairness Act processing sales tax for businesses will be transparent and seamless. For years, brick and mortar retailers have paid huge sums of money to accountants and undergone audits at tremendous expense. Today, technology eliminates those burdens and expenses for all businesses freeing up valuable time and money necessary to grow their businesses. Did I mention this valuable service is available free of charge to any e-commerce business, and (yes) even eBay can easily integrate the process into their checkout platform.
Burdens and costs are a thing of the past. Technology makes processing sales tax for a mere 10,000 tax jurisdictions child’s play compared to complexities involved in shipping goods to over 40,000 different jurisdictions. One more thing, retailers using certified service providers also receive indemnification against any audit issues that may arise from incorrect states’ provided data or CSP applications.
It’s time business owners understand the truth, and not the 1992 antiquated arguments perpetuated by eBay and their affiliates. After all, does anyone really believe eBay, a huge e-commerce company with IT infrastructure trac king millions of transactions and various commissions every minute and gross revenue of $14.3 BILLION is in capable of integrating existing technologies the automate sales tax processing into their checkout processes? It is obvious to me they are simply worried about their 6% price advantage. In my opinion falsely promoting and enabling tax evasion is one of the most unpatriotic acts an American business can do.
1. The passed bill in the Senate is S743, not S336.
2. Limitations: While the bill exempts software errors, it does not exempt User errors, like coding a taxable item as a non-taxed item.
3. 9000 tax districts. Actually there are over 13000. Software should handle that, but S743 defines a State as the several States, DC, all US Territories, and (565) Sovereign Indian Nations. Sellers will be required to file over 600 monthly/quarterly returns, even if the tax due is $0. Sellers are also subject to the same number of audits, even if only to see if they qualify for the the exemption.