For remote-selling companies sales tax is a sustainable advantage, and local businesses and national retailers have been lobbying against it for years.
In the 1990’s, the Supreme Court opened the door for change but Congress hasn’t moved on it. Momentum has been slowly building, and a major shift in policy looms. The Marketplace Fairness Act of 2013 would give states broad power to enforce tax collection on remote sellers.
MFA passed in the Senate in May, and is currently with the House’s Judiciary Committee. Most remote sellers oppose MFA for obvious reasons, but a deeper look at the real implications of MFA is worthwhile. Many may find that the alternative, state-enacted regulations, could be far worse.
MFA is quite brief as tax legislation goes, running about four pages. In a nutshell, MFA gives states the power to enforce the Streamlined Sales and Use Tax Agreement (SSUTA), a project that has been in the works for over a decade.
Frustrated by the lack of progress in Congress, several state and local taxing authorities pooled their resources into this shared initiative writing software requirements and recommending new guidelines for member states.
The SSUTA has gained momentum and is now a cooperative effort of 44 states, local governments, and businesses. Twenty-four states are full members, having passed conforming tax legislation. The SSUTA is quite complex, and a lot of the rhetoric around MFA misses the mark. Here are some things that SSUTA got right:
- The SSUTA certifies third-party software to collect and remit tax. Providers have the authority to negotiate audits on the seller’s behalf, and are mostly free to sellers as costs are covered by the member states.
- Local jurisdictions still have taxing authority, but rolled up to the state level. Service providers interface with states, who distribute collected taxes accordingly.
- Product category definitions are unified. States can exclude tax on product categories such as food, but must agree how “food” is defined. SSUTA defines the categories and states maintain a rate and exclusion database.
- Tax exemptions, such as for non-profits or resale, have a common form for all member states. State databases determine exemptions, and companies offering exemptions in good faith aren’t liable for fraudulent claims.
There are also areas where SSUTA needs to improve:
- Errors in collection or remission are paid by the party at fault (state, software provider, or seller), but there are gray areas. Sellers need additional protection from potentially substantial penalties.
- Exemption certificates are still required for each buyer/seller relationship, a big administrative burden for remote sellers.
- Consumables used in manufacturing can be considered use or resale, and sellers could be held liable for miscategorization.
- A Small Seller exception releases companies with less than $1 million in remote sales. Some want it removed, others want the limit raised.
- Service providers are agents of the seller but certified and compensated by the SSUTA, calling into question their loyalties.
- Remote sellers face large administrative costs adapting to new requirements, impacting their short-term profitability.
The SSUTA is a good step forward, but still has room for improvement. MFA is stalled in the House and unlikely to become law this term. Judiciary Chairman Bob Goodlatte (R-VA) is publicly opposed and anti-tax influencer Grover Norquist has joined the debate as well. Whether that is good for remote sellers is debatable, because it leaves states open to enact independent policies that may be even harder to manage.
States are becoming increasingly creative in their nexus arguments. Activities such as storage of marketing materials, licensed software services, and web affiliates are all being used to assign nexus. New laws are continually being introduced, leading to more companies collecting tax on remote sales.
Sellers assigned nexus must conform to individual state laws and remit the proper taxes without state-funded software. Colorado now requires a calculation of use tax on all remote seller invoices, a first class letter to all Colorado buyers annually with their total use tax obligation, and annual reporting to the state. This led to an injunction by a federal judge, but it was recently overturned by a higher court and the law is back in effect.
Most remote sellers don’t want a federally mandated sales tax law because it’s more work and their prices become less competitive. However, without it state and local governments are free to initiate policies that heap big costs on remote sellers. Many of these actions are worrying enough that remote sellers no longer have the luxury of maintaining the status quo.
A federal solution is becoming more attractive, and it’s time for remote sellers to get familiar with the SSUTA. It may not be a perfect solution, but remote sellers should make sure their position is accounted for. To join the discussion, visit www.streamlinedsalestax.org.