The Marketplace Fairness Act 2013 was passed by a majority of 69-27 votes. The Bill will now be sent to the Republican-controlled House of Representatives.
The Bill would allow states to require internet B2B and B2C sellers with over $1 million annual national online sales to collect sales tax and remit the revenue to the consumer’s location.
If made law the Bill would overturn a 1992 Supreme Court decision, which said a merchant had to be physically present in a state to be required to collect tax.
There is more interest in and visible support for the measure than at any time in the past, according to Harley Duncan, state and local tax leader in KPMG’s Washington national tax practice.
William Ault of Crowe Horwath believes there is a good possibility that a strong coalition of conservatives and liberals in the House of Representatives will form to pass its own version of this Act.
“Conservatives may support the Act because the tax collection powers it bestows on states favour state’s rights. Liberals may support the Act because it raises revenue for states that are faced with service cuts due to looming deficits,” said Ault. “If it passes the House, the President has indicated he will sign it.”
Effect on businesses
The implementation of the tax should arguably be neutral for merchants selling business to business because the collection of tax is part of the service provided to their business customer so that they don’t have to go to the trouble of self-assessing the use tax, according to Ault.
“For business to consumer sellers, who have achieved more than $1 million in out of state sales, this levelling of the playing field may make it harder to compete with razor thin margins because their price advantage is, in many cases, the tax that is not collected from the consumer,” Ault said.
However advisers have said the legislation should simplify sales tax compliance in states that require large remote sellers to collect.
“The Act would permit the larger companies to avoid years of uncertainty and tax litigation about whether click through referrals or email blasts create a physical presence in the states,” Ault said.
“Larger companies generally would prefer to collect this tax from the customer than to take the risk that the uncollected tax, interest and penalties would be assessed against them,” he added.
However Ault said the Act would not just apply to internet sellers.
“The Act would likely force many businesses, both foreign and domestic, to file sales tax returns in additional states,” Ault said. “States will be able to assert that remote sellers in foreign countries must also collect state sales taxes in states where they have an economic presence but no physical presence.”
Paul Morton, head of group tax at Reed Elsevier, said in general suppliers of the same goods or services to the same customers should be subject to the same taxes so as not to distort the market. Therefore from this perspective the Bill seems to be a move in the right direction.
However Morton believes there also needs to be a balance struck between the practicalities of compliance and the need to secure a level playing field.
“Collecting taxes remotely is particularly difficult for smaller businesses but even for the largest concerns the number of taxing jurisdictions and tax rates can lead to huge complexity,” said Morton. “More work is required to streamline these processes.”
How business should prepare
Advisers say the requirements a business collecting in a number of new states for the first time would face include ensuring it is properly registered for tax collection and remittance as well as determining whether the products it sells are considered taxable in each of the states.
Businesses would also need to establish a process for gathering, retaining and cataloguing exemption certificates that would be required if it will be dealing with potentially exempt customers in any state. It would also need to ensure it has sufficient information to be able to determine the correct tax rate in the multiple jurisdictions into which it will make sales.
Developing the capacity to properly collect the tax from the customer and file the necessary returns and remittances in a timely manner would also be vital.
“Given that implementation of the Act could occur in over 20 states within 180-270 days after enactment, it is not too soon for businesses to begin evaluating the potential implications and assessing the options they have for meeting the compliance requirements,” Duncan said.
