By Sheryl Nance-Nash
Legislators recently introduced a new version of the Marketplace Fairness Act that allows states to collect sales tax for online purchases made in their state.
"This proposed federal legislation is a total win for the states," says Dan Effron, partner with Marcum LLP
. It's also a win for brick-and-mortar retail stores that are required to collect sales tax when online competitors are not.
Prior to the act, states were unable to collect sales tax on most online retail sales because states only have the power to enforce state laws on companies that have a physical presence or are headquartered in that state. The advocates of the act argue that local businesses, which are required to collect sales tax on every sale, were placed at a disadvantage, since savvy shoppers could effectively avoid paying sales tax by purchasing the same items online, explains Sophia Duffy, CPA, JD, assistant professor at The American College .
The act gives states the authority to enforce sales tax collection requirements on most retailers (those with over $1 million in remote sales) for online sales purchased by residents of the state, even if the retailers have no physical presence in that state. "This evens the playing field between online and local retailers," says Duffy.
Cash-strapped states see dollar signs. The states will not need to update any of their internal systems at all, since the burden will be on companies selling over the Internet. However, that is not to say they will not face challenges. "The new proposed act does not require any physical presence, so I believe that compliance, monitoring, and auditing at the state level will be significant challenges, unless the states decide to hire workers who will do nothing but surf the web all day looking at websites," says Effron.
Who is likely to be most impacted by the change in the law? "This is going to create quite a compliance headache for smaller online retailers. The rules regarding states and sales tax differ greatly from one state to the other. Therefore, the online retailer will have to become well versed in each state's tax rules, which can be overwhelming to a small retailer. Retailers will be required to file sales tax returns in each state (depending on the volume of sales, as frequently as every month in some cases) and remit that tax, creating a compliance headache," says Vince Porter, CPA, at Porter & Company, PC .
Not only will small and medium-sized businesses feel the pinch and pressure of now needing to register and begin filing sales tax returns in many states, Effron says, "My fear is that states will try to expand (or at least inquire) about a company's activities in a state to see if they would also be required to file for income tax purposes as well as sales taxes." While the legislation does include a small business carve-out that would exempt those businesses from these new rules, "I could foresee an explosion of state tax notices coming out of this," warns Effron.
The act does, however, require adopting states to provide free software to do the rate calculations and remissions. But the cost of integrating such software into point-of-sale systems still will be incurred by the company. "And to be sure, audits and records will need to be retained, etc. The compliance burdens are real and have a significant cost. These small businesses will have the same compliance burdens as the largest retailers in the world, yet the impact of these costs to their bottom line will be proportionally much larger," says Rocky Cummings, tax partner and national director of state and local taxes at BDO USA
It is not just small and midsized businesses that stand to lose ground. "Ultimately the consumer loses, because not only will prices of goods and services be higher, but potentially, there will be less emphasis on customer service from brick-and-mortar retailers if they no longer need to differentiate themselves from price competition on the Internet," warns Thomas Torrillo, CPA, audit partner and director of retail and consumer products at Metis Group LLC
What should business owners do?
The big question, though, is what are accountants and CPAs advising their clients to do? First off, small retailers need to carefully monitor this legislation. "You need to know if and when it will take effect so you can put the processes in place to collect the tax from the consumer so you don't expose yourself to an unanticipated liability," says Cummings.
Know the facts.
The act has an exemption for small businesses with remote sales receipts under $1 million annually. Remote sales are sales made to customers in states where the retailer does not have a physical presence. In addition, only states that are "full member" or "associate member" states are granted the enforcement authority under the act. These states have either adopted the Streamlined Sales and Use Tax Agreement (SSUTA)
or have adopted minimum tax simplification mandates required by the act. If your state is not a full or associate member, the state cannot enforce business owners to collect sales tax.
If you do not qualify for the small business exemption and your state is a full or associate member, your state may require you to collect sales tax. If your state does not require sales tax collection, when you must start collecting depends on the status of your state. Full member states may require online retailers to begin collecting sales tax on the first day of the calendar quarter (but at least ninety days after the act has been enacted). Associate member states have the required laws in place, but the laws have not yet gone into effect. The laws are required to go into effect within twelve months of becoming an associate member, explains Duffy.
The act has called for the creation of Certified Service Providers (CSPs)
to perform the tracking and calculation of tax on remote sales for the retailer. CSPs must be certified by the state, and each CSP provides the same basic services. Online retailers must choose a CSP from a list of approved vendors. "Research the various CSPs to determine which one is a good fit for your company. Determine if you need to upgrade or change your sales systems to comply with the act's reporting requirements," advises Duffy.
Get solid accounting software. You want to be sure you have the best software to record all of your customers' sales accurately. "It's imperative that online retailers have a reliable piece of accounting software to record sales and sales taxes and jurisdictions of customers. QuickBooks is a great piece of software (at an affordable price) that can track all of this information, including the rates of each state and the collection agent of the state," says Porter.
Understand the sales and income tax ramifications of your business model. Keep in mind matters such as where your server is located. "Understand your Cloud vendor agreement and have a good understanding of what your employees and agents are doing in tax jurisdictions outside of your home state," says Torrillo.
Go on the defense.
Reexamine your business model. "Be sure there is a reason other than the fact that you do not charge sales tax for someone wanting to buy from your company," says Carol Markman, CPA, partner at MayerMeinberg LLP
Finally, says Duffy, "Prepare your business against angry consumer calls by informing them via a web posting or mass mailing to explain that the state is now requiring you to collect sales tax on purchases made from the online store."