Navigating the Wild World of Internet Sales Taxes in the New Year

Jan 29th 2015
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If your retailer clients were expecting a new law in 2014 to allow a tax on Internet sales, they’ll have to wait until sometime this year—maybe. In July, the much heralded Marketplace and Internet Tax Fairness Act (S.2609) was introduced  in the Senate. The bill combines the earlier Marketplace Fairness Act and Internet Tax Freedom Act.

But late last year, a motion to consider the bill was withdrawn in the Senate. House Speaker John Boehner (R-Ohio) said he would block the bill amid Republicans’ concerns that consumers would consider the measure a form of tax increase.

Here’s a snapshot of S.2609’s provisos. Note the fourth bullet item about “sourcing.” We’ll come back to that farther down.

  • States can require a remote seller to collect sales and use taxes only if the seller’s gross annual receipts in total U.S. remote sales for the prior year are more than $1 million.
  • “States” also include the District of Columbia, Commonwealth of Puerto Rico, Guam, American Samoa, U.S. Virgin Islands, Commonwealth of the Northern Mariana Islands, any other U.S. territory or possession, and tribal organizations.
  • “Remote” means sales into a state based on sourcing rules.
  • “Sourcing” refers to where the product or service is received by the buyer. If an address is unknown and a billing address is unavailable, the remote sale is sourced to the seller’s address.
  • According to a provision known as the minimum simplification requirements, "states will provide a single entity that’s responsible for administering state and local sales and use taxes for remote sales, processing returns and audits; a single audit of remote sellers for all taxing jurisdictions; and a single sales and use tax return to be used by remote sellers.
  • States can’t require more of remote sellers than they do of non-remote sellers.
  • States must provide free software for remote sellers to calculate sales and use taxes, and file returns.
  • Software service providers must be state certified.
  • The bill doesn’t encourage states to impose new taxes.
  • There’s no effect on in-state sales.
  • Amends the Internet Tax Freedom Act to extend the ban on Internet access taxes to Nov. 1, 2024.

According to Hill watcher Jonathan Barsade, legislative alternatives under consideration include how to source the Internet transactions. If sourcing shifts to where the seller is rather than the buyer, it raises numerous questions, says Barsade, founder and chief executive officer of Exactor Inc. in Pennsylvania, which offers cloud-based solutions for sales tax compliance.

For example, the state where the seller is located will have to remit taxes to states where the buyers are located, he says.

“So if you are a seller located in a low-tax or no-tax state, and you are selling to somebody in California, California will have to accept a low tax from a state with, say, a 3 percent or 4 percent tax rate,” Barsade says.  “California will be out the difference between the [seller state’s] low tax and its tax.”

The states missing those added tax revenues will have to make up the shortfall, which could lead to higher taxes, says Barsade, who does not represent any retail group in the matter.

Accountants at companies with cross-border sales issues, or who have such companies as clients, will want to keep a close watch on developments in Washington.


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