How to Prepare Clients for the Marketplace Fairness Act

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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.
 
Biggest losers
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."
 
 

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I can't believe they expect the small-mid size retailer that also sells online to comply with all the same sales tax rules nation-wide as the big box or big-online multi-BILLION dollar retailer who already has a full staff of tax accountants working for them.

again - they do not expect small retailers to comply with today's state-by-state "mashup" - Rather, the bill expect the states to simplify their laws to minimize or eliminate any concerns about undue burden by making it extremely easy (even free) for retailers. Learn more at http://marketplacefairness.org - its all there for the reading.

The Main Street Fairness act would have required that states align with a single system (SSUTA). But that appears dead. What you're pointing at is the Marketplace Fairness Act, which requires only (in its own words) minimum simplification - in short, it allows every state to have different destination rates, different tax holidays, different regulations, different filing procedures, different auditing procedures. 50 states worth of regulation for every online business in America to track and comply with. An ungodly amount of regulatory complexity. And it doesn't need to be that way. In return for the federal government granting 50 states to the right to regulate businesses in every other state, they could be required to join a single unified system that 22 states have already joined (SSUTA). Unfortunately, there are too many people with vested interested in complex regulation: big business wants to kill small; physical wants to kill online; states don't want to adopt common regulations; companies like FedTax and Avalara want to make money -- so in the end, it's small businesses who will lose. Let me know where I'm wrong.

The Marketplace Fairness Act (S.3326 / HR.684 - http://marketplacefairness.org) starts out by granting SSUTA states collection authority, exactly like the Main Street Fairness Act from previous sessions. However, recognizing that some states may have difficulty complying with all the provisions of the SSUTA, the MFA prescribes minimum simplifications that states can rely upon. These non-SSUTA minimum simplifications are coupled with a mandate that states provide free software for retailers to rely upon to manage sales tax calculation, reporting, and remittances.

Yes, states will still be allowed to set their own rates and rules because, in support of federalism the states remain sovereign. However, if these states want an out-of-state retailer to collect sales or use tax from their residents, they are required to either adopt SSUTA, or implement the minimum simplification provisions. Technology has now advanced to the point that retailers can have an easy-to-use option which automatically respects the democratically enacted local variances.

Finally, to your last point, it is true, we do not operate TaxCloud as a charity - but pretty close to it. We specifically designed our service to be "self-service" so we could operate solely from states-provided compensation for our efforts. With thousands of small businesses already using TaxCloud today (all at no cost to them), I think the evidence is in our favor that small businesses absolutely benefit from states modernizing and simplifying.

FYI everyone, any business already utilizing modern checkout and shopping cart platforms such as 3DCart, OS Commerce, Miva Merchant, Kona Kart, X-Cart, Zen Cart and so many more already have automated sales tax processing freely available. That's right, no integration costs, it's already there integrated into the checkout process. The passage of Federal Legislation will encourage other platforms to provide the same free, seamless automated tax processing. This is a win win for all online merchants. I am a small business owner sharing the good news. No longer are businesses burdened by costly legacy tax processing. Online businesses using 2013 modern technology are freely and easily able to calculate, collect and remit sales tax for any jurisdiction in any state.

Cart software can help with calculating the rate (out of ~9600 shifting rates nationally, depending on destination, commodity, and tax holiday status). But they don't help with filing the sales tax forms with the states and handling audits. 45 states to file with. Up to monthly filing = 540 new tax forms to file each year. That's an unbelievable new burden for small online businesses. Given normal audit cycles and durations, 3-4 state audits are likely to be active at any time. Online businesses will need at least 3-5 staff, plus management and outsourced services to handle. Many online businesses over the exemption and under 5-10 million will go under. Figuring out the rate and charging it isn't the big deal - filing and audit handling are!
The "Marketplace Fairness Act" has the support of big business, to squash small sellers < 30 million under a mountain of regulation. If it were just about fairness, support would be there for the "Main Street Fairness Act" which designates a single entity to file with and be audited by (SSUTA) -- 50x less regulation to achieve the same end. But the smart legislation appears dead.

Actually, yes the free services do handle filing, reporting, remittance, and even audit defense.

FedTax - the company you work for - is great (the best free service out there, as far as I can tell), but covers only 24 states, right? What about the other 21 states with sales tax? Does Fedtax cover filing and audit defense for them? Also, FedTax covers several dozen carts (https://taxcloud.net/partners/... but there are hundreds out there. It just takes one to be missing (one state or one cart), and the automated process becomes manual. I believe my statements are right on, because they assume the use of a service like FedTax or Avalara. Please correct me where I'm wrong.

Hi Bernie, thanks for your response and your questions. I am happy to answer both:

First, regarding the 21 non-SSUTA states, you are correct, TaxCloud does not file or provide audit defense in those states (yet). We expect these states will modernize and simplify once the federal legislation granting collection authority is enacted. Importantly, to earn collection authority these states will be required to certify software providers such as us, and provide indemnification for retailers relying on such certified software. Even though we cannot file on behalf of merchants in these states (yet), we still stand behind the rates we provide and the reports we generate, which can be easily relied up to prepare periodic filings.

Second, regarding the shopping carts and order management platforms: We are working with many such platform providers to embed access to TaxCloud. Our population of is growing steadily and, as with the states discussed above, we expect this population to expand rapidly once the federal legislation granting collection authority is enacted. It is also important to point out that integrating with TaxCloud only requires implementing 5 APIs calls, so many of our merchants simply implement directly. This allows them several benefits, including a) they know how it works, and b) they know exactly where their transaction data is going, and c) they can do it all for free.

Again thank you for your questions.

Thanks for your informative replies. Note that the Marketplace Fairness Act requires small businesses to comply 90 days after enactment. Given that the problem is too large to automate quickly (which is why not even the market leaders like FedTax that have been working on it for years, have covered more than half the states yet), you can imagine the disbelief and alarm a small business (that takes compliance seriously) might have about this legislation.

To clarify:

Under the MFA, only the SSUTA states will have collection authority in 90 days (technically, it could be a bit longer as the bill says: "no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of this Act"). For all SSUTA states, there are multiple options already available for retailers to rely upon immediately, including TaxCloud, Avalara, TaxWare, and others.

For the states that instead elect to implement the minimum simplification provisions (rather than adopting the SSUTA), they do not get collection authority until "the first day of the calendar quarter that is at least 6 months after the date" that state enacts state-level legislation necessary to achieve the minimum simplifications.

Federal legislation seems more likely in the current 113th Congress than ever before to address the issue of remote seller nexus. Political leaders on both sides of the aisle have embraced the concept of remote seller collection obligation.

In addition to the Marketplace Fairness Act mentioned above, there are other pieces of proposed legislation kicking around the US Congress. That said, in essence, if not specific execution, they are all very similar. If and when the proposals become law, there still remains a period of agency rule-making, regulatory wrangling and eventual court challenges that will all contribute to the actual contours of the law. Bottom line: the details will work themselves out but the overall concept of remote seller collection obligation is as close as ever to reality.

Technology has driven the explosion in remote sales, just as technology now makes calculation of rules, rates and boundaries less daunting. Note all the proposed solutions are based on a destination model. The 'destination model' applies the rules and rates in force at the customer's location as the basis for the tax collected and remitted. As a result, the calculation of taxes for every address in the US (at least in the 45 +DC states that currently have a sales tax) will be a necessary capability for any vendor who is making sales across the US. The sheer number of boundaries, many times with unique rates and rules reflects some serious numbers, on the order of 12,000 or so in the US. On the other hand, technology in geo-coding has made leaps in recent years such that some sharp software providers already have mated the two and created advanced sales tax engines capable of efficient, accurate calculations.

In many respects, the US Congress is late to the table in addressing remote sales for sales tax purposes. (Remember it was 1959 when Congress dealt with this issue for income tax purposes: PL 86-272). As Congress works through adoption of remote seller collection obligation, vendors and their advisors should already be looking ahead at other issues related to new technology capabilities. The fast advancing mobile commerce revolution, including devices that allow any smart phone to become a business location, global sales, including the implications of globally diverse logisitics, or virtual currency and the virtual items it can purchase all reflect the next frontiers in sales tax compliance evolution.

Don't you Lawmakers understand the meaning ITS NOT YOUR MONEY. IT DOES NOT BELONG TO YOU. After we pay every GD tax in the book its not enough! YOU DO UNDERSTAND THE MEANING OF EXCHANGING WEALTH AND YOU HATE IT! ITS FREEDOM AND YOU HATE IT. THATS WHY YOU REGULATE IT AND TAX IT! iTS A BIG WIN FOR THE STATES!! FREEDOMS AND WEALTH LOST FOR AMERICANS!!!! Fairness! BS!!

1) I visited the website http://www.marketplacefairness...
. Their website indicates that http://www.taxcloud.net/ is free software that
plugs into websites and calculates the various sales taxes from different
states. I believe this is the software that members of the U.S. Senate have
been talking about. Some Senators are saying it will be an easy transition
for e-commerce businesses to comply with the proposed legislation because they
simply plug their websites into this free software. Currently,
my e-commerce platform does not offer a plug in to this free database, they have
a connection with one that is set up and ready to charge a per transaction fee.
I spoke to a representative at Tax Cloud and asked them how we would handle
telephone orders. Many of our orders are not processed on line but are also
taken by my wife over the phone, via purchase order, and mail order. Tax Cloud
said their software only works for on line orders. Therefore, we would be
required to provide separate uploads of data showing additional taxes we
collected from other methods.

We will have to try and determine the tax amount to charge on every phone
order. On each telephone call we will have to determine if an item is taxable or
not for another state. In Minnesota clothing is exempt. In some states medical
equipment might be exempt. How will we be able to handle this? This will be a
paperwork nightmare. We use QuickBooks to do our accounting.

There is another company that plugs into QuickBooks that allows you to upload
your tax data; however, they charge $0.60 per transaction to calculate the sales
tax. Again, this is basically our "transaction tax" for collecting taxes for
"another state." This will cost us MORE than our credit card transaction fees,
per transaction. This would cost a business like ours an additional $1,200 to
$2,200 a month in extra fees. The FREE software does not address telephone,
mail, fax and purchase orders and address a FREE way to upload the data.

Tax Cloud also said they have contacted e-commerce platforms and Quick
Books Accounting Software and they show no interest in developing an easy plug
in to use their FREE software. Tax Cloud said that there is FREE money
available for these companies to integrate their software with this program. My
guess is these companies have chosen to ignore Tax Cloud because they have
agreements with other companies that are going to charge for this services. It
is not as easy as the lawmakers think it will be.

Small Seller Exemption

2) Regarding the small seller exemption for companies
selling less than $1 million to remote locations. This exemption does not take
into account remote sales that are made to charitable organizations, schools,
churches, etc...A large portion of our sales are shipped to tax exempt
companies. It is quite possible that if we were to subtract our tax exempt sales
from our gross receipts we would be under the $1 million mark. Would we be
exempt? Currently we do not have to collect tax exempt forms for companies
located outside of Minnesota. This legislation would require us to handle a lot
more paperwork. We are a 2 person company and we do not believe we should be
forced to hire employees to handle the financial impact of this legislation. We
want to stay small. If this legislation goes into effect this year we would be
forced to comply because last year we had $1.4 million is gross sales, but we
did not keep track of non taxable sales from out of state. Had we kept track of
the non-taxable sales from resellers and nonprofit groups; most likely we would
be able to claim less than $1 million in taxable retail sales.

3) Again, regarding the small seller exemption. This
exemption does not take into account the actual profit margin a company is
selling their items for. We sell at a low profit margin and move a lot of
product. Just because a company has over $1 million in sales does not mean they
should be penalized. Some of our competitors most likely have less than $1
million in gross sales. Now our competitors will be able to take sales from us
because they are exempt from sales tax. I believe our companies gross sales and
our income will go down from this legislation.

4) Big business (Walmart, Best Buy, Amazon and others) are
backing this legislation because they want a fair playing field. A fair playing
field was erased when these monster companies expanded and crushed small
businesses in America. These companies already have the advantage of buying in
bulk and undercutting their competitors. The Internet has allowed some small
companies like ours to actually compete with the large companies that spend
millions of dollars to lobby our law makers and influence their decisions. These
companies are merely upset because they have grown to a level where they have a
physical presence everywhere.

Enforcement of the Law –STATE or FEDERAL LEVEL

5) Regarding the wording in the Market Place Fairness Act,
"Persons with 1 or more ownership relationships shall also be aggregated if such
relationships were designed with a principal purpose of avoiding the application
of these rules." In my former career as a Special Agent with the U.S.
Department of Agriculture OIG, my primary investigations involved individuals
circumventing the farm payment limitation provisions. This legislation will
create many "sham" entities (similar to the farm program) where businesses will
be set up under other people’s names to avoid exceeding the $1 million limit.
You will be creating new legislation that will require massive amounts
of tax money to enforce the provisions.

6) Both of our Senators in Minnesota support this
legislation and are co-sponsors on the bill. I spoke to one of our
Senator’s staff members regarding my concerns. They said this will
level the playing field for the “small” businesses where people go in and try on
a pair of shoes, seeing if the shoes fit correctly, and then ordering online
because the item is cheaper. The staff member called this process, “show
rooming.” My opinion, the show rooming is going on with some products, and the
“big” business interests are upset because they cannot have “it all”. Our
lawmakers are only listening to the companies that have the money to complain
the loudest through lobbying. They are actually ignoring the real small
businesses in America. The items that are being show roomed are not the items
you will find at most “mom & pop” walk in retail stores. Those types of
stores were destroyed long ago. In many instances the Internet is where you
will find the “new” modern day “mom & pop” stores.