When states need to raise money, one of their favorite ways to do so is to tax out-of-state sellers; this is exactly the position that Oklahoma Governor Fallin and the state legislature found themselves in.
The state’s teachers, who were ranked 49th in the county for lowest pay, went on strike for better pay and more spending on education overall. The problem was there was no money in the budget, but the politicians passed a $457 million revenue bill that included an “Internet” tax that allowed the teacher’s to get a very well deserved average pay raise of 16 percent, moving them to 29th in the nation from 49th.
The hype surrounding the tax shows Amazon, eBay, Etsy and other marketplace facilitators are the intended targets. Since they would take the brunt of having to collect the tax.
What is the Impact?
If the tax burden truly fell 100 percent on the marketplace facilitators it would be a win for everyone. But it does not. There is a notice and reporting requirement option in this legislation. This means a marketplace facilitator has two options:
- voluntarily collect sales tax for both their own sales
- collect sales tax from third-party sellers
So, OK residents pay tax on each transaction, raising prices they pay across the board. The OK residents may or may not agree with this as the money is earmarked for a good cause. However, instead of collecting the tax a marketplace facilitator could use the second option.
This option is to notify the OK purchaser that they, the purchaser, is required to pay the tax directly to the state. In addition, the marketplace facilitator has to notify the purchaser that they will be supplying the state with a list totaling the transactions made by the purchaser.
Here is what I believe many customers may think: “Since you are not doing your job and collecting the tax, you are now forcing me to do it for you. And to add insult to injury you are going to “rat” me out to the state to make sure I do. Not cool.”
While I think it makes common sense to begin collecting tax in this no win situation, this is not always the case. For example, Rhode Island passed similar legislation that became effective last August and Amazon turned over the information of all their third-party sellers to the state. Amazon was already collecting tax on their own sales. It will be interesting to see how Amazon, eBay and the other marketplace facilitators respond.
Who are the Biggest Losers?
Perhaps the biggest losers with this kind of legislation are the thousands of small sellers from around the country who fit the definition of a remote seller, which is pretty easy to meet. A remote seller is anyone who makes sales in a forum, with annual gross revenues in OK greater than $10,000 in the preceding 12 months, and who is not a marketplace facilitator, marketplace seller, or a referrer.
The term ‘forum’ is very encompassing and includes websites and catalogs. So, if you are making $10,000 in sales per year from your own website, you have the same requirements as Amazon.
This does not seem very equitable to me. The requirements are to “voluntarily” register to collect tax or follow the notice and reporting requirements which are paraphrased below:
- Post a notice on your website that you do not collect tax in OK, that use tax may be due to the state on their purchase, and if due than the purchaser is required to file a return with the state.
- At the time of sale provide a second notice stating that no tax has been collected and, the transaction may be taxable and if so the use tax must be remitted directly to the state.
- By January 31st a third notice must be sent by first class mail to the billing address if known, but if not known than it should be sent to the shipping address. This notice must include the same language as the previous notice but must also include a listing of all purchases and a comment that a list of all customers with purchase information will be sent to the state.
- Also by January 31st, the list containing customer information must be sent to the state.
Does This Sound Like Extortion?
If all of that extra work sounds exhausting, it gets worse when we look at the penalties. For each notice that is missed, there is a potential minimum penalty of $20,000 or 20 percent of your last 12 months of sales whichever is less.
So, on $10,000 in sales if you had 200 transactions you could potentially have fines of $400,000 or more. I don’t think this will happen, as the OK Tax Commission has the ability to reduce the penalties if the penalties create an economic hardship, but that's the way the statute is written.
Did I mention extortion? Remember this all goes away if you choose to register. Even without the devastating fees, the cost to comply for small to medium sized sellers is prohibitive.
I personally spoke with one seller when Colorado implemented notice and reporting requirements last July. He did the math and said it will cost 58 cents to perform the requirements. With an average sales price of $10 would kill his margins.
Personally I think, his numbers were low but he was confident. It didn’t matter though because he said, “I give up; the state wins.”
It is cheaper and less risky to become the state’s tax collector, which is what the state wants to happen. Since the state cannot currently force you to collect tax if you do not have a physical presence, the state wants to make your life so miserable, that you volunteer to collect the tax.
Have I Mentioned Extortion?
How can the states get away with this? By now you may be asking, how do states think they can get away with this. Perhaps you may be thinking on waiting to act until the courts strike this down.
Well, while an OK court may strike this down for state constitutional reasons, most attorneys I talk to tell me the concept is here to stay. Colorado first introduced notice and reporting requirements back in 2010.
The Direct Marketing Association filed an immediate injunction and fought this in the courts for seven years. It went to the US Supreme Court twice during that time, the first time the Court heard it, they said it was not a tax and sent it back to the lower court who ruled in favor of CO.
It was appealed back to the US Supreme Court who refused to grant cert in December of 2016. So, while the court never decided on the merits they did have two opportunities to strike it down, which they did not.
Colorado implemented in July of 2017 and since that time a number of states have either passed stand-alone notice and reporting requirements or have coupled the requirements with marketplace sales taxes. The thresholds and penalties are different for all states that have passed this.
The worst states in my opinion are OK, PA, RI and WA. The thresholds in OK, PA & WA are $10,000 and in RI it is 200 transactions. The minimum penalties start at $10,000 in RI and go way up from there.
Some of the other states to review are CO with a $100,000 threshold and LA with a $50,000 threshold. Vermont has no minimum threshold, while are other states either do not have a penalty or do not currently appear to be enforcing.
It is becoming a lot more dangerous for small to mid-sized businesses selling on the Internet, and this is before we get a decision from the US Supreme Court this coming June. As CPAs, we need to be aware of these issues for our clients, because even small companies with relatively low sales can have relatively huge exposure around the county.
A review of our retail clients is in order, to determine if their potential liability is material. My recommendation is that once the threshold is crossed in most of these states, the most conservative action is to register and collect the sales tax.
Mike is the founder of Michael J Fleming & Associates dba Sales Tax and More. Prior to beginning this new venture, Mike spent the better part of a decade with Peisner Johnson, an accounting firm that is focused entirely on solving state and local tax issues.