The clash between retailers and states over cross-border taxation is coming to a head, with four federal proposals currently under consideration to provide a solution. The issue is that states are prohibited from imposing sales and use tax liabilities on companies without an in-state physical presence, a result of a 25-year old Supreme Court decision (Quill Corp. v. North Dakota, 504 U.S. 298).
As a result, ecommerce businesses without an in-state physical presence have been able to avoid state sales tax liability during this time of surging online sales – and local brick and mortar stores are none too happy with the price advantage this gives online retailers.
While there is no federal sales tax in the United States, federal law does control when a state may require a seller to collect and remit sales taxes on transactions. Under current law, a state can’t compel a “remote seller” – a business without a physical presence in a jurisdiction – to charge tax on sales into their state. This rule, referred to as the “Quill doctrine,” has been in place for years, long before the explosion of remote ecommerce.
While states are bound to this existing requirement, Congress has the authority to create new rules. As states are grappling with budget deficits due to declining sales tax revenues, there is rising momentum seeking to solve the issue.
Currently, four pieces of legislation at the federal level could address the issue.
- H.R. 5893, the “No Regulation Without Representation Act of 2016,” sponsored by Rep. Jim Sensenbrenner (R-WI)
- S.B. 698, the Marketplace Fairness Act (MFA), sponsored by Mike Enzi (R-WYO)
- H.R. 2775, The Remote Transaction Parity Act (RTPA), sponsored by Rep. Jason Chaffetz (R-UT)
- Discussion Draft: “The Online Sales Tax Simplification Act of 2016” (OSSA), by Rep. Bob Goodlatte (R-VA)
H.R. 5893 would require the fewest changes for sellers, upholding the physical presence for taxation mandated in the Quill Doctrine. At the other end of the spectrum, OSSA represents wholesale changes to the tax structure, establishing a federal-level state tax clearinghouse that would facilitate sales tax revenue disbursements. MFA and RTPA, similar in nature, lie somewhere in between. They would allow states to charge sales tax to remote sellers that are members of the Streamlined Sales Tax Agreement or enact certain standards that simplify tax processes.
No matter the ultimate solution selected, change is coming for any business conducting remote sales, and the business impact – especially under MFA, RTPA or OSSA – would be significant. As such, retailers should carefully review each state in which they sell and consider how they will comply with potential regulations. Here are a 5 ways companies can start preparing now:
Evaluate Sales Volume Across the Country
Under most of these proposals, sellers would be required to determine tax rates, product taxability rules and collect and remit taxes in jurisdictions in which they never have before. To prepare, businesses should evaluate their sales volumes across the country.
This would provide a rough idea of the short-term impact of legislation. Of course businesses would need to continually monitor state legislative changes and their own sales volumes to determine if their compliance obligation widens over time.
Streamlined Sales Tax Agreement
Sellers should categorize their products in a way that makes sense based on taxability concerns. The Streamlined Sales Tax Agreement is a good starting point as it has created a taxability matrix that shows how certain items are taxed in certain states. Under any scenario, sellers will need to be clear on how their products are defined in each state as it may differ.
Producing Transaction-Level Data
To ensure taxes are being calculated correctly, sellers may be required to produce transaction-level data specifying the product sold, the price and delivery location. Discount details, shipping costs and customer information may also be needed. Retailers will need to ensure that their ecommerce and accounting platforms produce the complete records needed by tax authorities, and that the customer experience remains uniform.
Be Prepared to Answer Customer Questions
Invariably, questions will arise from customers as to why the products are being taxed, the rate being applied, etc. Businesses should be prepared to field these questions. For example, will a FAQ page suffice or is full-scale customer support required?
Allocating Internal Resources
Finally, organizations should allocate internal resources to provide support and answers in case a state has tax questions or if they open a sales tax audit, as well as to stay on top of regulatory changes. Some of the proposals provide free certified software and many audit questions and regulatory updates will be facilitated by the software provider. However, someone affiliated with the seller that understands the products sold and how sales are being processed will need to coordinate closely with the provider in the event of an audit.
While the exact solution to the ecommerce sales tax dilemma is still pending, there’s no doubt that it’s only a matter of time before businesses have to change the way they calculate and report taxes on remote sales. Following these 5 steps will help companies avoid confusion and fire drills when these changes are ultimately enacted, creating a more seamless experience for retailers and their customers alike.
Matthew Walsh is Vice President of Tax at Sovos Compliance