High on the agenda for Congress is to level the playing field between brick and mortar retail stores and the internet. For the past few years, there has been discussion on passing legislation that would require you to pay your State’s sale tax regardless of where you make your purchases.
The Senate has passed the Marketplace Fairness Act a few weeks ago. This legislation gives states the power to better enforce their sales tax laws. The bill is now in the House of Representatives, where it stands a tough battle to pass. However, the general consensus is that some form of this is going to pass.
Without the Marketplace Fairness Act, the States are unable to require remote retailers to collect the existing sales or use tax already mandated by state laws for in-state residents. This has had a significant impact on State budgets.
The exposure to business owners is that now they must collect the correct sales tax on all of their web sales as well for all states and jurisdictions that have sales tax!
The Marketplace Fairness Act grants states the authority to compel online and catalog retailers (“remote sellers”) with over $1,000,000 in total sales, no matter where they are located, to collect sales tax at the time of a transaction – exactly like local retailers are already required to do. However, there is a caveat: States are only granted this authority after they have simplified their sales tax laws.
Simplification is required because of two prior Supreme Court rulings citing concern that collecting sales tax for multiple states would be too difficult. The Marketplace Fairness Act requires that states must simplify their sales tax laws in order to ease those concerns and make multistate sales tax collection easy.
Specifically, states seeking collection authority have two options for simplifying their sales tax laws:
Option 1: A state can join the twenty-four states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), or
Option 2: Alternatively, states can meet essentially five simplification mandates listed in the bill and agree to:
1. Notify retailers in advance of any rate changes within the state
2. Designate a single state organization to handle sales tax registrations, filings, and audits
3. Establish a uniform sales tax base for use throughout the state
4. Use destination sourcing to determine sales tax rates for out-of-state purchases
5. Provide free software for managing sales tax compliance.
With states adhering to these provisions or the similar measures, retailers across the country will find collecting sales tax for multiple states much easier than it has ever been in the past.
Since companies would be required to collect sales tax in 24 states as early as October 1, 2013 should the Marketplace Fairness Act soon become the law, companies selling in e-commerce should review existing sales tax compliance measures and required changes in order to be prepared for this major shift in sales tax compliance.
Virtually none of the popular small business accounting software programs are equipped to do this properly so please call us to discuss some potential alternatives to solve this problem.
Adapted from the Daszkal Bolten LLP Email Newsletter 5/13/13