Online sales in the U.S. were over 50 billion dollars in the first quarter of this year and as technology advances and as businesses continue to sell more products online it follows online sales will continue to grow. Today e-commerce businesses are only required to collect taxes from online sales if they have a physical presence within the state they are doing business with – -whether it be a store, call center or warehouse. Technically, if a customer does not pay sales tax for an online purchase, they are responsible for paying Use Tax on these items which is commonly ignored during tax filing season.
Which is why with pressure from brick and mortar businesses – the government is considering the Marketplace Fairness Act. As the Marketplace Fairness Act reads now, it would require online merchants “remote sellers” with over $1 million in annual sales to collect and pay sales taxes to the customer’s state, even in states where the business does not have a physical presence. The bill also requires states to simplify tax collection and offer free tax collection software. The bill is designed to create a fair marketplace for offline retailers and consequently create extra revenues for state and local governments. Although the bill is not mandatory for all states, each state can pass legislation conforming to the “Streamlined Sales and Use Tax Agreement” and it is likely that states will as it will result in more tax money to balance their budget sheets.
So say for example, you run a New York-based company that sells into other states, and only collect sales tax in New York today, all of your sales into other states would be counted as “remote sales” under MFA. In addition, if your company has ownership interest in another company, you might also be required to add their remote sales numbers to yours.
Even if this bill becomes law tomorrow, some states will have to implement significant tax code simplifications in order to enforce it. Even then, states would not be allowed to implement the law earlier than 180 days following enactment.
Roughly half of the states with sales tax have already simplified their sales tax codes to the level required by MFA. The remaining states would need to pass laws to affect similar changes, including elements like a centralized sales tax administration and uniform rates, rules and boundaries.
Even if MFA passes and you are under the small seller exemption, none of your existing collection obligations go away. Assuming your company already calculates, collects and remits sales tax correctly in every state, and many don’t, passage of this legislation will add new compliance requirements to many companies.
Many states have already enacted laws that require certain out-of-state businesses to collect sales tax. These laws, typically called “Amazon laws,” require more out-of-state businesses to collect sales tax, even if they lack a significant physical presence in that state. If MFA passes, and your business would be eligible for the small seller exemption under MFA, your company may have to comply with Amazon laws in states like Texas and California.
The bill has been passed by the Senate and is being considered by the Congress. It could go into effect as early as this October. To date, 24 states have passed the conforming legislation. It might be good for your business to start preparing now as well. Strategize at an early stage. Analyze how taxes will affect your competitiveness in the market and what you can do to ensure you’re on top. You may want to consider implementing ‘Free Shipping’ and other promotions to balance out the impact of sales tax. It is always better to think ahead.