September 2, 2011
Proposed legislation in the U.S. Congress, if passed, will essentially make online merchants tax collectors, forcing them to collect sales taxes for all purchases. This is the latest attempt by cash-strapped states to collect sales tax revenues from online sales.
The Main Street Fairness Act (MSFA), introduced by Senator Dick Durban (D-IL), would change the current law which requires merchants to collect sales tax only when the merchant has a physical presence in the state. The effect of MSFA on online merchants, particularly small merchants, could be huge.
The Current Sales Tax War
The general rule regarding sales taxes is that merchants are required to collect sales taxes on the sale of tangible property to purchasers located within the merchant’s state. For sales to purchasers outside the merchant’s state, the merchant is required to collect sales taxes only for sales into a state where the merchant has a “nexus”, meaning a physical presence. The taxes on these sales are supposed to be paid by the purchasers in the form of use taxes, but most use tax obligations are not paid, and as a result states claim that they are losing between $21-34 billion.
Currently, Amazon.com and big box merchants such as Wal-Mart and Target are locked in a war involving whether Amazon’s affiliates should count as nexus for sales tax purposes, even though Amazon.com does not have a physical presence in the affiliates’ states.
Up to now, attempts by several states to force out-of-state merchants such as Amazon.com to collect sales taxes have been relatively unsuccessful. For example, Illinois and California passed so-called “Amazon laws” requiring out-of-state merchants to collect sales taxes if they employed marketing affiliates located in Illinois and California. Amazon.com retaliated by shutting down its affiliate program in Illinois and California, just as Amazon.com had done previously when Hawaii, North Carolina and Rhode Island passed similar legislation.
After these shut downs by Amazon.com, it’s been reported that Wal-Mart and other big box merchants added fuel to the fire by offering to work with the terminated Amazon affiliates.
The Main Street Fairness Act
The introduction of MSFA is the most recent attempt to bring the U.S. Government into the war, but in a different way that does not involve nexus (a physical presence). Under MSFA, a participating state would be able to require the collection of sales tax by remote merchants that do not have a nexus in their state.
It’s important to note that MSFA makes no mention of nexus. Under MSFA nexus in no longer a consideration. Instead, to take advantage of MSFA, a state must have adopted the Streamlined Sales and Use Tax Agreement (SSUTA) and passed implementing legislation. In part, SSUTA requires states to follow uniform practices, including uniform product definitions, uniform sales tax filing requirements, uniform collection through the same office, an uniform registration of merchants through a centralized multistate filing system. At present, 24 states have implemented SSUTA.
What are the benefits of MSFA? The huge beneficiaries are participating states in terms of increased tax revenues collected by merchants. Estimates of “lost” tax revenues for all states combined generally fall in the range of $21-34 billion.
Are there any benefits for online merchants and consumers? Dick Durban’s website claims that MSFA:
* does not create a new tax, but provides a necessary tool to collect an existing tax in a simple and fair manner;
* releases consumers from tax remittance obligation;
* treats all merchants with equal sales tax collection responsibilities; and
* reduces collection costs and provides compensation for all sellers required to collect sales taxes.
Somewhat surprisingly, Amazon has reportedly come out in favor of MSFA. Apparently, Amazon’s opposition to the prior “Amazon laws” was based on Amazon’s belief that these laws would make it more difficult to report and collect sales taxes. Under MSFA, Amazon believes that the playing field has been leveled.
What about start-up and small online merchants? Will they conclude that tax collection is really not worth the administrative hassle? One key provision of MSFA is an exemption for small sellers. The catch is that Durban’s bill doesn’t define “small”, so we don’t know at this time the scope of the exclusion.
If MSFA passes, the big winners will be the state taxing authorities with increased tax revenues.
Large online merchants such as Amazon.com will not be losers because they have the administrative resources to collect and pay the taxes with the new uniform rules.
Will small online merchants be losers by having to deal with the hassle and expense of the additional administrative burdens? The answer depends on how the “small” exemption is defined. If you’re a small online merchant, you should pay close attention to MSFA. Better yet, contact your U.S. Senators and express your concerns.
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