The Resurrection of the Marketplace Fairness Act

What your clients need to know about changes to Internet sales tax laws

Link:  Learn how it works

Avalara

It seemed, in the spring of 2013, that Internet sales tax would soon become a reality. The Senate had overwhelmingly passed the Marketplace Fairness Act of 2013 (MFA) and sent it to the House for consideration. Amazon.com was collecting sales tax in a growing number of states, including New York, where the company’s efforts to battle the state’s Amazon tax law failed. Small business owners and lawmakers across the nation were increasingly calling for remote retailers to collect sales tax like their brick-and-mortar counterparts. Numerous states were considering or enacting some sort of remote sales tax legislation.

And then momentum stalled. Several federal lawmakers said they would work to ensure the bill would not become law. In September 2013, Chairman of the House Judiciary Committee Bob Goodlatte (R-VA) expressed concerns that the bill was too complex and released Seven Basic Principles on Remote Sales Tax to guide future discussions. And then the issue went dark until March 2014, when a hearing was held on the matter.

2014 was then going to be the Year of Online Sales Tax, although MFA did nothing but gather dust in the House. When the measure failed to come to a vote during the regular session, pundits said it would come up during the Lame Duck Session. House Speaker John Boehner said it absolutely would not. He proved correct, and 2015 arrived with no remote sales tax law.

Nonetheless, optimism reigns among proponents of Internet sales tax legislation. Perhaps 2015 will be the year. And if it is, now is a good time to talk to clients about how this could impact them.

There are currently three versions of remote sales tax legislation floating around the nation’s capitol. Each one would create different consequences for remote retailers. The best thing you can do for your clients is to help them understand all three – and help prepare them to eventually collect in states where they do business. The lack of a federal solution has sparked a plethora of remote sales tax legislation at the state level.

The Marketplace Fairness Act of 2015

The new version of MFA is similar to the 2013 bill and is, in fact, sponsored by many of the same lawmakers.

Under MFA 2015 (Senate Bill 698):

  • States with simplified tax code are given additional taxing authority over remote sales.
  • There is a small seller exception for sellers with gross annual receipts of less than $1,000,000 in total U.S. remote sales.
  • Sales are destination-sourced (the sales tax rate is based on the location where the buyer receives the product or service).

The 23 member states of the Streamlined Sales and Use Tax Agreement (SSUTA) are well positioned to take advantage of this legislation. They are authorized to collect and remit sales and use taxes on remote sales “pursuant to the provisions of the Streamlined Sales and Use Tax Agreement… beginning 180 days after the State publishes notices of the State’s intent to exercise the authority under this Act, but no earlier than the first day of the calendar quarter that is at least 180 days after the date of the enactment of this Act.”

States that are not full members of the SSUTA must adopt and implement certain “minimum simplification requirements” in order to collect and remit sales and use taxes on remote sales. For example, they must have a system in place to provide remote sellers and certified software providers with 90 days’ notice of a state or local rate change. The authority to collect “shall commence beginning no earlier than the first day of the calendar quarter that is at least 6 months after the date that the state” implements the minimum simplification requirements.

States could not “begin to exercise the authority” under MFA 2015:

  • Before the date that is one year after the date of the enactment of this Act; and
  • Between October 1 and December 31 of the first calendar year beginning after the date of the enactment of this Act.

MFA 2015 would have no effect on nexus; it would neither alter existing nexus nor create nexus between a state and a seller. Sales made to states with no sales tax would not be subject to tax.

In addition, it would have no effect on seller choice: “Nothing in this Act shall be construed to deny the ability of a remote seller to deploy and utilize a certified software provider of the seller’s choice.” Finally, MFA 2015 would not impose new sales and use taxes or affect intrastate sales or the Mobile Telecommunications Sourcing Act.

Remote Transactions Parity Act of 2015

The Remote Transactions Parity Act of 2015, drafted by Rep. Jason Chaffetz (R-UT), is similar to the MFA in that it would allow states to apply sales tax to remote sales. The measure is still a draft.

As with MFA, the 23 member states of the SSUTA would be authorized to require remote sellers to collect and remit sales tax “beginning 180 days after the State publishes notices of the State’s intent to exercise the authority under this Act.” And as under MFA, remote sales tax could not begin “before the date that is 1 year after the date of the enactment of this Act,” and during the October 1 – December 31 holiday shopping period “of the first calendar year beginning after the date of the enactment of this Act.”

Non-member states would have to adopt and implement certain minimum simplification requirements. Only after such requirements have been met may remote sales tax collection start, and then only as early as the first day of a month and commencing “no earlier than the first day of the calendar quarter that is at least 6 months after the date that the state enacts legislation to exercise the authority granted by this Act.”

The small remote seller exception is different from the small seller exception under MFA. In the Remote Transactions Parity Act, remote sellers must:

  • “Have gross annual receipts exceeding $10,000,000 in the calendar year preceding the first calendar year any State can exercise the authority provided under this Act.”
  • Have gross annual receipts exceeding $5,000,000 in the “second calendar year any State can exercise the authority provided under this Act.”
  • Have gross annual receipts exceeding $1,000,000 for the “third and subsequent calendar year any State can exercise the authority provided under this Act.”

In addition, the December 2014 draft bill provides for a catalog seller exception. Sellers that sell only through catalogs and do not engage in any “sales activity on the Internet of any kind whatsoever, whether directly or through another person, including advertising, order acceptance, solicitation, and payment processing” may not be required to collect remote sales tax.

The Remote Transactions Parity Act, like MFA, would have no effect on nexus; sales made to states with no sales tax would not be subject to tax. In addition, it would create no new taxes and have no effect on intrastate sales or the Mobile Telecommunications Sourcing Act.

Online Sales Simplification Act

House Judiciary Chair Bob Goodlatte (of 7 Principles to Guide Online Sales Tax fame) and Rep. Anna Eshoo (D-CA) quietly distributed a draft version of the Online Sales Simplification Act (OSSA) to committee members in January.

OSSA is quite different from MFA 2015 and the Remote Transactions Parity Act. Most notable, perhaps, is that it does not provide for a small seller exception and it would allow states to require in-state sellers to collect sales tax on all interstate sales.

Under OSSA:

  • Sales are origin-sourced (the sales tax rate is based on the location of the seller instead of the purchaser).
  • A lowest combined rate of sales tax is established for remote sellers from states with no sales tax.
  • Sellers remit the collected sales tax to the origin state.
  • States “determine the total tax imposed on remote sales for which that State was the origin State” each month.
  • The taxing authority of each participating state “shall distribute the tax collected on remote sales for which that State was the origin State to each State that was a destination State for such sales, in proportion to that State’s share of the collected tax on remote sales, using a single entity (including with respect to funding and staffing)….”

The Sales Simplification Act adds layers of complexity to remote sales tax collection. Under it, “the lowest combined rate within any of the contiguous 48 States that do impose a sales tax” would be determined and remote sellers located in states without sales tax would be required to collect that “flat tax” on all remote sales.

Also, the origin-sourcing makes it so a Washington State resident who purchases an item on the Internet from a seller based in Florida would pay the Florida rate of sales tax instead of the Washington rate (eventually, Washington State would receive that revenue).

States that opt to not participate in this method would be prohibited from imposing sales tax on remote sales.

The Next Step

The issue of remote sales tax has long been brewing and eventually it will come to a head. Earlier this year, Supreme Court Justice Kennedy spoke of “a serious continuing injustice faced by Colorado and other states.” He was referring to the fact that the Court had, in the past, determined that “States cannot require a business to collect use taxes… if the business does not have a physical presence in the State.” He continued with this:

“There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet…”

Prepare your clients for the eventuality of collecting sales tax in states where they do business. Such a requirement could grow out of federal legislation like the three examples above; it could be triggered by legislative changes at the state level; or it could be caused by a United States Supreme Court decision.

A nexus study can help your clients understand where they currently have nexus and how various proposed changes to remote sales tax legislation could impact their business in the future. Automated sales tax Software-as-a-Service will enable your clients to stay on top of new rules and obligations, facilitating sales tax management and increasing compliance. In addition, it frees resources for more profitable activities. Learn how it works.

Navigating 10,000 Sales Tax Jurisdictions

The number of sales tax jurisdictions in the United States has risen to 9,998 –up 300 from 2011. The table below breaks out the number of sales tax jurisdictions by state:

Total Sales Tax Jurisdictions, 2014
Alabama 791
Alaska 103
Arizona 131
Arkansas 370
California 231
Colorado 307
Connecticut 1
District of Columbia 1
Florida 56
Georgia 162
Guam 1
Hawaii 2
Idaho 9
Illinois 443
Indiana 1
Iowa 994
Kansas 428
Kentucky 1
Louisiana 341
Maine 1
Maryland 1
Massachusetts 1
Michigan 1
Minnesota 35
Mississippi 3
Missouri 1242
Nebraska 209
Nevada 18
New Jersey 2
New Mexico 142
New York 84
North Carolina 105
North Dakota 137
Ohio 96
Oklahoma 587
Pennsylvania 3
Puerto Rico 79
Rhode Island 1
South Carolina 41
South Dakota 251
Tennessee 125
Texas 1515
Utah 310
Vermont 12
Virginia 174
Washington 346
West Virginia 11
Wisconsin 70
Wyoming 23

TOTALS 9998
Source: Vertex, Inc.
Despite simplification efforts on both the state and federal level, it would appear that the complexity of navigating sales tax in the United States has risen.

The Marketplace Fairness Act (MFA), a piece of legislation that would give states the authority to require remote sellers to collect and remit sales tax, overwhelmingly passed the Senate last year. Although it has been held up in the House of Representatives, pressure from numerous supporters is indicative that it, or future legislation, will eventually pass both houses. The MFA includes a provision that stipulates that certain simplifications must be made to a state’s tax code in order for states to qualify to collect online sales tax.

According to the Tax Foundation, an independent non-partisan tax research think-tank, in an attempt to convince Congress to allow jurisdictions to collect sales tax on interstate internet transactions, states have made the claim that they have simplified their sales tax systems. The Tax Foundation asserts that, while the number of jurisdictions within a state isn’t everything, “no matter how it’s measured, states haven’t yet fulfilled their promises to simplify their sales taxes.” Still, the likelihood that businesses will soon have collection liability on internet sales is becoming a more plausible reality as the MFA continues to gain traction.

MFA 2014

The backers of the Marketplace Fairness Act (MFA) are apparently planning on re-doubling their efforts to pass the legislation. According to an article from Internetretailer.com, a letter In support of the MFA, written to U.S. Rep. Robert Goodlatte (R, VA), lists “more than 300 signatories, including 174 trade associations and dozens of retailers among 137 individual companies.” The MFA would allow states to require remote sellers to collect sales tax on items that were sold within the state.

Read More:
Backers renew their push for online sales tax legislation

Major Issues with Colorado’s MFA Compliance

In the event that the Marketplace Fairness Act (MFA) passes, many states must first make some changes to their tax codes before they can collect sales tax from internet retailers. These changes mainly deal with either complying with the streamline sales and use tax agreement, or making specific changes to their tax code that includes establishing a uniform sales and use tax base, and uniform tax definitions. In anticipation of the MFA passing, Colorado passed House Bill 13-1288 that requires the Colorado Department of Revenue (DOR) to work with municipalities and counties in order to create a uniform sales and use tax base as well as uniform tax definitions. Based on a stake holder meeting held by the DOR the following issues will be brought up in their report:

1)      The tax on food for home consumption and residential power account for a majority of the local jurisdictions’ revenue;

2)      In order for local jurisdictions to remain solvent and revenue neutral without experiencing huge tax increases, the State would have to remove the exemption for food for home consumption and residential power;

3)      The State currently taxes cigarettes while local jurisdictions do not.  By taxing cigarettes at the local level, this would bring an offset of additional revenue to the local jurisdictions (approx. $30.5 mill);

4)      Certain items that are currently taxed by the locals would need to be exempted.  The DOR preliminarily identified the following few items:

  • a.       Industrial energy;
  • b.      Agricultural compounds & bull semen;
  • c.       Pesticides;
  • d.      Corrective eyeglasses, hearing aids;
  • e.      Wireless Telecomm Equipment.

5)      The report will also make recommendations for creating uniform tax definitions for all items taxed or exempted and would use a majority of the definitions found in the Streamlined Sales Tax agreement (SST) www.streamlinedsalestax.org;

This information was provided by the Colorado Association of Commerce and Industry.

 

Colorado Poised for Passage of Marketplace Fairness Act

Colorado has approved a bill that sets parameters and guidelines if the Federal marketplace fairness act were to pass.

Read the bill here:

http://www.leg.state.co.us/clics/clics2013a/csl.nsf/fsbillcont3/5C6B90638BBED01887257AEE0057C8B0?Open&file=1295_01.pdf

ONLINE SALES TAX?

The next time you purchase the new Justin Bieber album or a pair of leg warmers online, you may have to pay sales tax.

This week the Senate will be voting on the Marketplace Fairness Act, which would grant each state the power to collect sales tax from internet sales.

This bill has come into existence partially because of decreased pressure from Amazon, who now has physical distribution centers in almost every state, thus giving the company nexus in those states.

This law would potentially level the playing field between online and brick and mortar retail shops making prices equal for both types of entities.

Read More:

http://taxfoundation.org/blog/senate-voting-week-expanding-state-authority-collect-internet-sales-taxes

Video:

http://nyti.ms/Ux4veT