The new internet sales tax that seems ready to pass the Senate May 6 is likely to bring operational challenges as well as burdensome tax collecting responsibilities to CFOs and their staffs at small and medium size retailers.
That’s because the bill, called the Marketplace Fairness Act, requires the collection of online sales tax from retailers that make more than $1 million in total “remote” – Internet, mail order or telephone – sales. The low threshold would mean many small online retailers without sophisticated operations or systems would have to comply.
“By having it apply to companies with $1 million in remote sales revenue, it’s going to be a difficult burden on a lot of small companies,” says Brian Pedersen, a managing director with tax advisory firm Alvarez & Marsal Taxand.
From an operational standpoint, retailers will have to get their information technology systems ready to prepare sales and use tax returns and file them with [many more] jurisdictions, says Pedersen. “There’s quite a lot of back-office preparation that will be required if this is enacted. Most jurisdictions require monthly filings of sales and use tax returns.”
Tax changes at the transactional level are some of the hardest that CFOs and their staffs have to deal with, says Jeff Saviano, Americas director of indirect, state and local tax at Ernst & Young. He says it’s very important that the tax has a $1 million remote revenue exemption for the smallest companies.
Under the Act, the remote sale would apply to where the goods are delivered. As it stands, the Act would be less of a burden on a large traditional retailer that does only a portion of its sales remotely, but more challenging for a small firm that does the bulk of its sales online or by telephone.
“Right now if the online retailer does not have a physical presence in a state — that means property, inventory, warehouse or people — the seller does not have to collect the tax,” he says. But under the Marketplace Fairness Act, a relatively small retailer with $1 million to $5 million in sales would have to not only collect the tax in the 30 or 40 states it may sell in, says Pedersen, but also figure out which city, state and municipal tax rates to use. “That’s why it can mushroom very quickly.”
Indeed, part of the difficulty in collecting sales tax lies with the way the U.S. tax jurisdictions are set up. Currently, there are about 9,600 different tax jurisdictions in the United States, according to the Tax Foundation, a Washington, D.C.-based think-tank. In addition, the jurisdictions vary by what products are considered taxable. “Even the biggest companies we work with have difficulties with all of the jurisdictions,” explains Pedersen.
The new bill attempts to alleviate some of that complexity. On a state level, the Act would specify the products and services that would be subject to sales taxes. And, among other requirements, it would provide a single entity within a state that would be responsible for all state and local sales and use tax administration.
But, if enacted, the Act would not give every jurisdiction the right to require collection and remittance immediately. As Don Roveto, a managing director with Alvarez & Marsal Taxand, explains, a given state would have to have previously adopted or agree to adopt the Streamlined Sales and Use Agreement (SSUTA), a multistate agreement that was first released in 2002 and amended in May 2012, or meet other mandates called for in the bill. (The SSUTA provides uniform tax procedures to simplify the administration of tax collection.)
Supporters of the bill say it’s only fair that online retailers have to collect taxes like retailers that sell their products in physical store fronts. Online retailers have been exempt from collecting taxes dating back to a 1992 Supreme Court decision (Quill v. North Dakota).
After what is expected to be an easy Senate approval on May 6, the Marketplace Fairness Act would still have to be voted on by the House of Representatives, which could be a harder sell.
A key sticking point in further legislative discussions could be the $1 million threshold for determining which retailers have to comply. As Roveto notes, the threshold could still be increased but it likely would not be lowered below the current $1 million level. “There have been companies that have proposed having a $10 million threshold based on what they are defining as small business. If anything, the direction would be up, not down.”
Ultimately, Congress will have the last word. “It is Congress’ right to regulate interstate commerce and Congress has the authority to pass legislation in this area,” says Pedersen.
It is not the first time taxing internet sales has been proposed in Congress. Prior bills with the same concept have varied in scope and in name, but for the most part, attempted to bring the same results — to level the playing field between “brick and mortar” retail shops and big online retailers.
If this bill does finally get passed and signed, some corporate executives just might feel relieved. A survey of 420 tax directors by Ernst & Young this week showed that 44% of them ranked the uncertainty caused by legislative gridlock and the temporary nature of many tax codes as their top concern for 2013.