Will the Marketplace Fairness Act simplify sales tax regulations?

sales tax regulations

sales tax regulations

Marketplace Fairness Act Header

History suggests think again

Congress is currently debating the Marketplace Fairness Act which in theory will create a standard set of rules for online retailers to collect sales taxes. Right now, laws are different in each state which makes compliance confusing and difficult, congress is hoping that the Marketplace Fairness Act will simplify sales tax regulations.

Supporters of the Marketplace Fairness Act say this bill will create a level playing field for retailers across the nation. Sound almost too good to be true? It very well could be considering the lack of impact we’ve seen from the similar Streamlined Sales And Use Tax Agreement.

sales tax regulations

Will the Marketplace Fairness Act simplify sales tax collection as stated in its reason for existing?

What is the Streamlined Sales & Use Tax Agreement?

The SSUTA is an agreement that tried to create a standardized set of sales tax laws across multiple states. It was designed to make it easier for companies operating in different states to stay complaint. The SSUTA also tries to encourage online retailers to follow the same sales tax laws as brick and mortar businesses to supposedly make things more fair. Where have we heard that before? The SSUTA has many of the key goals of the Marketplace Fairness Act. The big difference is that the SSUTA was only approved by certain states whereas the Marketplace Fairness Act is a federal bill on the national level.

Where the SSUTA ran into problems

So what happened with the SSUTA? Well, while the crafters of this agreement wanted it to go national, they ran into participation issues. Forty four states helped put together the legislation for this bill which was a promising start. However, only 24 of these states actually passed the legislation to make the act state law. That means just 33% of the U.S. population resides within a SSUTA state. What’s even more problematic is that none of the six largest states, for various reasons, are part of this group.

As a single example of how complex this  lack of coordination could end up being, New York is embroiled in a long standing legal issue  over the laws for defining nexus. Nexus is the way state governments determine whether a business has enough of a presence within the state where it needs to register and collect sales taxes. In the past, this was based on whether or not the company had a physical location in the state. Now that we live in the digital age, state governments have broadened the nexus definition and this is where things can get messy.

While the SSUTA has a set of rules defining nexus, the New York legislature still has the freedom to make its own rules. One controversial law in New York says that just getting a click-through referral from an affiliate in the state is enough to create nexus. In other words, if a New York-based company with a web site accepts a fee to refer a customer to Amazon, Amazon in theory would need to collect New York taxes on the sale.

This is both extremely difficult to track and very different than what other states have agreed to. Amazon and other online retailers are challenging this law with the Supreme Court.

Will history repeat itself?

So the SSUTA, which has been under development for no less than a decade, hasn’t even gained acceptance by half of the country. As it is currently written, the nation-wide Marketplace Fairness Act is obviously going to have a difficult time clawing its way through opposing forces in Congress. The MFA is geared toward enforcing out-of-state sales tax collection for states participating in the SSUTA and gives non-participatory states the ability to opt out of the agreement. As a result, this bill is more of a guideline than a federal law and stands to make sales taxes more complicated rather than less.

We’re still a ways away from seeing the Marketplace Fairness Act enacted. The House has time to make changes and they probably will. Whatever happens going forward, it’ll be worth watching to see if Congress makes participation mandatory. Otherwise the MFA could turn into another toothless tiger.

 

Virginia joins crowd in demanding sales tax collection

Virginia sales tax collection

Virginia sales tax collection

Amazon begins sales tax collection

Virginia passed a law requiring  collection of sales taxes by large online retailers like Amazon.

Virginia has become the latest state to start requiring large online retailers to begin sales tax collection from Virginia residents. This new law went into effect as of September 1st, 2013. The Virginia state sales tax of 5.3% now applies to out-of-state sellers that maintain a distribution center, warehouse, fulfillment center, office, or similar location in Virginia that facilitates the delivery of tangible personal property.

Amazon for example now needs to collect sales taxes from Virginia residents because it has two large distribution centers in the state. This law does have an exemption for retailers that have less than $1 million a year in revenue.

Federal court okays controversial Colorado sales tax law

Colorado sales tax law

Colorado sales tax law

Colorado sales tax law

Federal court approves CO law to keep track of business’s sales tax transactions online.

A recent federal court of appeals ruling upheld Colorado sales tax law that would require out-of-state vendors to act as agents for the state. Vendors with no physical presence in the state will be either required to collect use tax on behalf of a Colorado-based purchaser or for the vendor to notify the purchaser of sales or use tax owed the state. The vendor would then be required to file annual reports detailing purchaser information. The retailer is effectively required to be a “trustee for any tax collected and …  act as an agent of Colorado. (Colorado Sec. 39-26-204; Reg. 39-26-204.2)

Colorado’s approach to out-of-state sales and use tax collection is somewhat unique and certainly controversial. The reason this bill is controversial is because it requires that business from outside of Colorado report customer information to the Colorado government. Critics wondered if this was an overreach from the state and the matter went to court. The appeals court ruled that this law is okay which sets the stage for Colorado regulators to start using tracking systems to monitor resident’s use tax obligation.

While this state-monitored system is likely to collect far more in use tax than the traditional method of asking residents to self-report tax owed, it will be interesting to see what happens to this law should the Marketplace Fairness Act push its way through congress.

Read more at The Daily Caller

 

The bizarre world of sales tax law

sales tax law

sales tax law

When you think about it, sales taxes shouldn’t be that complicated. You make a sale and the appropriate locality adds a fixed percentage to the price for its share. In a simple system, this would just be a grade school multiplication problem but do you think our governments ever keep things simple?

The truth is that over time, state and local jurisdictions have created all kinds of exceptions and special situations for tax laws. Some of these rules make sense, some are confusing, and some are just plain bizarre. Let’s take a closer look at the complex world of sales tax law.

 

What is taxed normally?

Sales taxes get complicated because they are controlled by state governments, not the federal government. As a result, each state has different rules for what transactions are taxed and which are not.

Generally, most states charge general sale taxes on the sales of tangible goods like furniture, toys, and jewelry. This is because many sales tax codes were created when the economy was based primarily on manufacturing. Now that we buy more and more services, states are starting to change tax codes to include services but this is still less common. A good rule of thumb is to assume that most tangible goods will be charged sales taxes and other purchases depend on your state’s specific rules.

 

Common exceptions to general rates

You’ll also see certain types of exceptions to sales tax law show up around the country. Many states waive sales on essential household goods. State governments often don’t charge sales taxes on groceries, clothing and medicine because they want to help taxpayers afford these necessary goods. Many unprepared foods are tax exempt or charged at a lower rate. However, state governments often charge full sales tax on prepared meals because these are more of a luxury than a necessity.

Sales of goods that are going to be resold are often exempt from sales taxes as well. Since the purchaser will resell the item and collect taxes then, the government doesn’t want to double-tax the transactions.  Many governments also try to subsidize certain industries like farming, manufacturing, and nonprofit organizations by offering sales tax exemptions or reductions.

On the other hand, state governments often charge higher tax rates on certain products like cigarettes and alcohol, offhandedly called “sin taxes”, to discourage their purchase.

You can see a pretty common theme here. The government waives sales taxes on activities it wants to encourage and support while increasing taxes on activities it wants to discourage. That makes perfect sense. As you go through these rules though, you start to see situations that leave you scratching your head.

 

Bizarre tax laws

Every state has its own strange tax laws. In New York, if you buy an unsliced bagel it counts as unprepared food and is tax exempt. However, if as soon as the seller slices the bagel, it is considered prepared and becomes taxable. Residents need to decide the extra convenience is worth another few cents in taxes per bagel.

packaging tax rules

Colorado doesn’t charge sales tax on essential food packaging items. However, packaging that is considered nonessential is taxed. Restaurants and vendors don’t need to collect taxes on cups or paper plates, but do need to collect taxes on lids and napkins.

Following the reasoning of essential versus nonessential, Colorado doesn’t charge sales tax on essential food packaging items. However, packaging that is considered unessential and possibly wasteful is taxed. In theory this makes some sense, but can you guess how it plays out? Restaurants and fast food vendors don’t need to collect taxes on cups or paper plates, but do need to collect taxes on cup lids and napkins. This ends up being more confusing than helpful.

Tax laws for religious materials also create problems. Most states exempt religious publications from sales taxes. Where do you draw the line at religious publications though? New religions are constantly coming up and often their publications fall outside the state guidelines and are taxed. What if a pastor buys a Dr. Seuss or Harry Potter book to make a point for a sermon? You can see how a well-intentioned tax law can create all kinds of controversy.

Location of the seller and buyer also complicates tax issues. Most states tax businesses that have a nexus in the state, meaning they have a physical presence in the area. For years, online businesses have been able to avoid state tax laws by never having a physical presence. However, several states have closed this loophole as legislators believe it gives online companies an unfair edge over brick and mortar companies. The Marketplace Fairness Act is also being considered by congress to mandate that online companies collect sales taxes in every Streamlined Sales Tax-conforming state.

There are passionate supporters on both sides of this issue.

Who says that tax law can’t spark exciting conversations?

The Marketplace Fairness Act update: where does this bill stand?

Fairness Act

Fairness Act

Marketplace-Fairness-Act

The Marketplace Fairness Act continues to gain momentum in Congress. On May 6th, the U.S. Senate passed this bill by a vote of 69-27. This puts the United States that much closer to collecting sales taxes on remote sales. The current Senate bill gives an idea of what this future tax environment could look like for every U.S. business.

Applies to nearly every business, not just internet retailers

While the Marketplace Fairness Act (MFA) is discussed as a bill impacting internet retailers, it could have implications for nearly every business making out-of-state sales. As written, the bill says it applies to “remote sellers” and doesn’t use the words “internet” or “online” anywhere. This creates a very broad definition and could include any business that makes sales in any state where it does not have nexus, which would apply to both brick and mortar and online retailers.

Small seller exemption

The current bill has a provision that would exempt retailers if their prior-year gross U.S. remote sales total less than $1 million. Any business making sales in states it doesn’t already collect tax in totaling $1 million or more collectively would be subject to collect and remit taxes to any state that has collection authority – chiefly the states signed on to the Streamlined Sales Tax Agreement.  This gross total includes all sales, not just taxable sales. There is also no minimum sales amount per state, meaning  that even a single $10 sale would require the remittance of the tax along with a sales tax return.

Concerns over foreign competition

The motivation for the MFA is that it is supposed to level the playing field for brick and mortar retailers by taking away the “unfair advantage” internet sellers have enjoyed by escaping out-of-state taxation. However, some critics are wondering if this law would now simply shift this advantage solely to foreign companies.

Right now, the bill doesn’t say whether non-U.S. based companies will be expected to collect sales taxes from American consumers. If they don’t, foreign retailers would have an advantage over American retailers. This could also create an incentive for American companies to move overseas.

What happens next?

Now that the MFA has cleared the Senate, it moves  on to the House of Representatives (H.R. 684) where it will go through a formal committee review before it is brought to the floor for a vote. During this stage, the bill could be changed significantly or could stall completely. Some believe the bill is likely to pass the House as it has a fair amount of momentum and lobbying power behind it. On the other hand, several key representatives have voiced strong opposition to the bill and could take steps to block or alter it during review.

What is particularly important to retailers is what happens to the small seller exception. There is a push to raise the minimum sales amount so more businesses would be exempt from the requirement to collect  the tax.

While the MFA still has a long way to go before becoming law, it’s now gone farther than any of the other internet sales tax bills that have come before congress to date.

We’ll post updates as this legislative process continues or you can follow the bill’s progress.

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