On May 6, 2013 the Senate passed the Marketplace Fairness Act of 2013 (Act) by a 69-27 vote. Passage in the Senate was considered a major hurdle for taxing Internet sales. The Act is now being considered in the House and it is likely that the House will propose changes to the Act that was passed by the Senate.
However, as it stands now, the Act would enable states to collect from certain remote sellers, sales and use tax on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a remote seller to collect the state’s tax unless the seller has a physical presence within that state.
The Act includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act.
Proponents of the bill say that the main issue is fairness. The impetus of the Act is that brick-and-mortar retailers have long argued that the physical presence restriction provides Internet (and other remote) sellers with an unfair advantage over them. By not collecting sales tax, online and other remote retailer sellers can, in effect, sell an item at a lower price than a store. Although purchasers are required to self assess and remit use tax to their state, purchasers often are not aware of this. Retailers who operate stores have increasingly complained of “showrooming” by customers who come to a store to browse and then order the same merchandise online so they will not be charged sales tax.
On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 state and local jurisdictions. Conservative groups also contend that the Act allows overreaching by state governments.
The Act would allow a state to require all remote sellers that do not qualify for the small seller exemption to charge, collect and remit tax on all taxable sales sourced to that state. Streamlined sales tax member states (22 states) would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act.
Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the state enacts legislation to exercise the authority and implements the Act’s mandatory simplification requirements.
Remote sellers that do not meet the small seller exemption need to be poised and ready to potentially begin to collect sales and use tax in all jurisdictions in which they have customer sales. They should be discussing this with their tax advisor and begin to contemplate how they will comply. Depending on the size and complexity of the remote seller as well as the number of sales and use tax jurisdictions in which the remote seller must collect and remit tax, software automation may be the only solution.
Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.