A year ago August, I wrote a blog about changes in State & Local Tax (SALT) rules. In that blog I put forth that the need for states to fund their growing deficits was the driving the force behind, not only increasing audit activities and enacting new regulations and surcharges, but broadening the scope of what constitutes a business “presence” in a state. Traditionally, a business needed to have a physical presence in a state before it could be assessed an income-based tax. But within the last few years states have expanded that to include an economic presence. As the collection of state sales tax decreased (due in large part to an increase in Internet sales) this was one of many ways to replace that lost revenue. At the time, states were hoping to further expand their tax base with the passage of the Marketplace Equity Act of 2011 whereby online retailers were obligated to collect and remit sales tax on in-state purchases. Although that Act expired in 2012, a similar act, The Marketplace Fairness Act (MFA) of 2013, was passed by the Senate on May 6, by a 69-27 vote.
How the MFA affects the consumer
The MFA actually takes the tax burden off of the consumer. As you may not know, or know and choose to ignore, the consumer is responsible for remitting sales tax if the online seller does not have a physical presence, or physical nexus, in the state where the item was purchased. They buyer is “required” to remit the use tax on their annual tax return. Needless to say, not many people do this and, as a result, an estimated $11 billion in sales tax has been lost. The MFA would serve to recoup those lost taxes by shifting the payment of those taxes from the consumer to the business. As it stands now, as per a Supreme Court ruling, out-of-state vendors may not be compelled to collect that state’s sales tax.
How the MFA affects online retailers
The MFA requires online retailers with remote sales exceeding $1 million in the preceding calendar yearto collect sales and use tax in the state where the item was purchased. As summarized by the Congressional Research Service:
The Marketplace Fairness Act of 2013 authorizes each member state under the Streamlined Sales and Use Tax Agreement (the multi-state agreement for the administration and collection of sales and use taxes, adopted on November 12, 2002) to require all sellers not qualifying for the small-seller exception (applicable to remote sellers with annual gross receipts in total U.S. remote sales not exceeding $1 million in the preceding calendar year) to collect and remit sales and use taxes for remote sales under the provisions of the Agreement, but only if such Agreement complies with the minimum simplification requirements relating to the administration of such taxes, audits, and streamlined filing set forth by this Act.
The MFA defines "remote sale" to mean the sale of goods or services into a state in which the seller would not legally be required to pay, collect, or remit state or local sales and use taxes unless provided by this Act.
Prospect for Passage into Law
Has much changed since my previous blog? No, not really. Although the Act made its way through the Senate, the House Judiciary Committee is exploring changes to the Senate version. Conventional wisdom is that there is little hope that the House-led Republicans, where many in that party view it as a new tax, will pass the MFA. In fact no date has been scheduled for a vote.
While there has been no resolution on the Internet sales tax issue, it is important to keep in mind that all other state and local sales and use tax laws are still in place. State and local governments are looking to tax revenue to fill their coffers. Business owners need to be aware of tax laws that affect their company’s nexus. Without an assessment of your exposure you may be faced with substantial penalties and fees.
If you would like to receive a copy of our Nexus Questionnaire to ensure that you fully understand the tax laws affecting your company, please click here.
Please contact Erick Cutler, Partner at Goldin Peiser & Peiser, LLP at 214-635-2541 if you have any questions or would like to receive further information on this topic.