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Online Sales Tax: Why E-Commerce Companies Are On Both Sides Of The Debate
If passed by the House, the Marketplace Fairness Act, which aims to level the playing field between online retailers
and brick-and-mortar businesses, could go into effect as soon as this fall. As it stands now, the bill would require remote sellers, including online businesses, with gross receipts over $1 million to collect sales tax in qualifying states — even in states where a business has no physical presence.
There is a high level of industry debate over the bill, with e-tailers on either side of the issue. Will it be the panacea proponents claim, making sales tax collection fair and streamlined? Or will it place an undue burden on e-commerce companies and hurt business?
What the Bill Says
At just nine pages, the Marketplace Fairness Act (MFA) is a surprisingly fast read. Here are some key provisions you might not be aware of:
- Not Mandatory for States: Most say the bill will simplify online state sales tax collections to two options: states that qualify and collect, and states that don’t.
- No Effect On Nexus: The MFA specifically states it has “no effect on nexus” and does not change how states define nexus, or the physical presence of a business. There are nine states that include affiliate marketers in their definition of nexus.
- State Requirements: States that want to collect sales tax from out-of-state sellers must simplify their tax processes and create a separate entity specifically for remote sales tax collection. Twenty two states have already begun the process as part of the Streamlined Sales and Use Tax Agreement (SSUTA), which is a move by states to simplify their tax laws and regulations.
- Free Software: Qualifying states must also provide free sales tax collection and filing software for remote businesses. In addition, the states must put in place certification procedures to approve certified software providers.
- Liability protection: Sellers will not be liable for errors or omissions made by a certified software provider. Likewise, software providers will not be made liable for inaccuracies made by remote sellers.
Use Tax & Nexus Laws
Currently, online businesses are required to collect sales tax from online sales only if they have a physical presence or nexus, like a sales office, call center, warehouse or store in that state. When sales tax isn’t collected, tax payers are responsible for paying Use Tax on items they bought online from out-of-state businesses. However, proponents of the MFA say most tax payers ignore the Use Tax law at filing time.
In 2011, California was the first to extend the concept of nexus to affiliate marketers. The state passed an “affiliate nexus” law, claiming that Amazon affiliates located in California constitute an in-state presence for the company. After a prolonged dispute, Amazon came to agreement with the state to build two warehouse fulfillment centers in the state. There are now nine states with similar “affiliate nexus” or so-called “Amazon laws”, including Arkansas, Connecticut, Georgia, Illinois, New York and North Carolina,
South Carolina, Texas, New Jersey and Tennessee have each struck their own deals with Amazon, deferring sales tax for a period of time in return for new distribution centers and the jobs that go with them.
Who Is Supporting The Bill?
According to a study commissioned by the National Conference of State Legislatures (which supports the bill), states lost out on roughly $11 billion last year from out-of-state sales tax on online purchases. States are looking to the growing e-commerce industry, expected to top $400 billion this year, to help fill their depleted coffers. Both the National Governors Association and National Conference of State Legislatures are proponents of the bill.
Amazon has had an about-face on the issue as it looks to expand physical operations in more states to facilitate faster and same-day delivery to compete with big box stores. The company says that by January 2014, it will already be collecting sales taxes from more than half the U.S. population.
The National Retail Federation supports the bill along with many other brick-and-mortar retailers who hope the sales tax will cut down on “showrooming.” Lowe’s, for example, has said it has a 5% to 10% price disadvantage compared with online rivals and that some customers go to Lowe’s to research products and then order online from another retailer to avoid sales tax. BestBuy, Target and Wal-Mart, which have a national presence and already charge sales tax for all online purchases, are also backing the bill.
Since the bill requires participating states to offer free sales tax software, it’s logical that sales tax software companies like Avalara and FEDTAX are open supporters of the legislation. They argue that the software already makes it easy to collect sales tax from the more than 9,000 taxing jurisdiction across the U.S. Steve Johnson, CEO of FEDTAX said of e-commerce businesses on Bloomberg, “The only reason they aren’t [treated equally today] is because of a perceive burden that technology somehow can’t keep track of several thousand jurisdictions, and that’s simply not the case anymore.”
The affiliate marketing industry, which has been hurt by the passage of “affiliate nexus” laws, also supports the MFA. Many online businesses in “affiliate nexus” law states simply opted to end their affiliate programs there in order to avoid paying sales tax. Rebecca Madigan, executive director of the Performance Marketing Association wrote that the bill will “remove the ability to avoid collection obligation if [online businesses] sever Internet advertising agreements.” She concluded, “This will allow online retailers to reinstate their advertising agreements and get 76,000 small Internet advertising companies back in business.”
Peter Hamilton, CEO of affiliate network program HasOffers, has been encouraging customers to call their congressional representatives in support of the bill. Writing on the HasOffers blog, Hamilton says, “The impact of the Nexus Taxes have been incredibly detrimental. We have seen many publishers and performance marketers actually move to another state just to stay in business and avoid the severance of their contracts with retailers.”
Steve DelBianco, Executive Director at NetChoice, an eCommerce trade association whose members include eBay and Overstock.com said in a Bloomberg interview that the bill imposes a “huge burden that gets in the way of an internet that’s been such an engine of growth for the U.S. economy.”
Opponents argue that the playing field is already level. They say online and brick-and-mortar businesses pay sales taxes exactly the same way: they pay in every state where they have a presence. Under the bill, online sellers instead would be subject to every tax jurisdiction in the country. In addition, companies based in states without sales tax—Alaska, Delaware, Montana, New Hampshire and Oregon—would still need to collect sales tax for goods shipped to sales tax states.
EBay and Etsy, fearing the law will hurt their seller communities, are among the most active opponents of the bill as it is currently written. EBay CEO John Donahue argues that the $1 million Small Seller Exception is too low and should be raised to $10 million or 50 employees. Many online sellers agree, saying that the Small Seller Exception is misleading since companies with gross sales of $1 million could have significantly lower net profits, or no profits at all.
Sylvia Dion, a CPA with PrietoDion Consulting Partners who advises companies on local sales and use tax issues, worries that the bill does not address the level of detail that retailers will need to deal with. “There are so many complexities that are not being addressed,” she says. “It’s much more than rate calculation.”
For example, the bill says tax is to be collected based on the shipping address, not the billing address of an order. This means purchases could be taxed based on where a gift-recipient lives rather than where the gift-giver is located, raising the question of whether this is a Use Tax or a Sales Tax. Add to that, Dion says, the facts that local sales taxes are based on geo codes, not zip codes, and that some products are taxed while others aren’t depending on the tax locality, add more complexity for remote sellers .
In answer to the argument that the software already exists to make tax collection easy and will be provided free by the states, Dion and others counter that while the software has been perfected and is as user-friendly as it can be, it’s not without human involvement. They say there is no denying that businesses will need to devote human resources to sales tax collection, and this will cut into profits, putting smaller sellers at a disadvantage and hurting the e-commerce industry as a whole.
As a counterpoint, Dion also raises the interesting question of whether smaller brick and mortar businesses will eventually start to question why their online counterparts get free software and a separate state-level entity devoted to their businesses.
While many proponents are looking to this legislation to make things simpler, the fact that the bill is optional for states means that there could be three tiers of states e-commerce businesses will have to work with: states that choose to stick with their current nexus laws or agreements with Amazon; SSUTA states and those that opt-in and qualify to collect taxes from all online retailers with sales in their states; and states who choose neither option. Again, this is theoretical, but it does appear to be a possibility.
Unlike the Senate, which whisked the bill through without committee review, the House has shown to be less open to the bill and is putting it through the normal channels. It is now with the Judiciary Committee. Committee Chairman Bob Goodlatte (R-VA) has expressed concern that the law raises inter-state regulation issues and could open the door “for states to tax or even regulate beyond their borders”. He said his committee will look at alternatives to avoid state overreach. What that means for the future of the bill is unclear at this point.
If the bill does pass in the House, the White House has signaled it will sign it. Then it will be up to the states to choose what to do and for e-commerce businesses to prepare to navigate a new landscape. Sylvia Dion suggests e-commerce companies follow the legislation closely and start looking at the non-nexus states they are selling in now. Consider what it will mean for your business to work with both nexus states and non-nexus states that could opt-in to the MFA (paying special attention to the 22 SSUTA states) if the bill passes.