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FedTax Hopes for Passage of Online Sales Tax Bill

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June 14, 2013

Sales and use tax software providers are hoping that Congress will pass the Marketplace Fairness Act, which would require online merchants to collect sales taxes from customers who owe it for Internet purchases.

The bill was passed by the Senate last month, but is awaiting action in the House, where it has been encountering resistance from anti-tax lawmakers (see Senate Passes Internet Sales Tax Legislation). FedTax is one of the sales tax software vendors who support the bill. Along with five other companies, FedTax is a Certified Software Provider under the Streamlined Sales and Use Tax Agreement, which has been adopted by 24 states so far. SSUTA would be an important part of the mechanism for making the Marketplace Fairness Act work.

“We are a CSP under the Streamlined Sales and Use Tax Agreement, so that means that we can handle everything for the streamlined states,” said FedTax CEO David Campbell in an interview Thursday. “We do reporting, remittance and response to any audit inquiries. The non-streamlined states, the states that basically haven’t certified us under the Marketplace Fairness Act, for those states we do expect that we will engage in a certification process in those states as well, so that we can provide service in those states as soon as they finish certifying us.”

David Campbell

FedTax currently manages taxes for clients in all of the states, Campbell noted. “It’s just that we can’t take it that last little bit and actually do the filings and indemnify the merchant unless the state certifies us,” he said.

For the states that may not join SSUTA, such as California, Illinois, New York and possibly Texas, Campbell expects they will take an alternate path that’s open to them in the proposed legislation. Under option 2, states that don’t become full members of SSUTA can meet five simplification mandates: Notify retailers in advance of any rate changes within the state; designate a single state organization to handle sales tax registrations, filings and audits; establish a uniform sales tax base for use throughout the state; use destination sourcing to determine sales tax rates for out-of-state purchases; and provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.

Campbell said FedTax is in talks with those states today about setting up their certification program. “Initially they were really hesitant to do a certification program, but then you explain that this is really an opportunity for the state of California to have people outside their states collect the sales tax for them,” he said. “States just have to meet them halfway. That’s what we do. We enable the states to meet the merchant halfway.”

FedTax does not charge merchants for its TaxCloud service. Instead it receives part of the tax money that goes to the state. “We are only compensated by the states, which gives us a little more flexibility when we’re talking to a retailer because historically retailers have had to pay for these services out of their own pocket,” said Campbell. “We work directly with the online platform that the retailer is already using, whether that’s an online shopping cart or a point-of-sale system or an order management system, and we work to get embedded directly, so it’s basically a default option within the network. It’s not a system that a retailer is going to have to figure out on their own. That’s where we think the biggest shift in the market is happening right now. Historically merchants had to go and pull together these resources and fund the integration efforts, but with the added efforts at the state level as well as the federal level, more and more merchants are possibly being exposed to expanded compliance obligations. Instead of them having the resources to try to reach out and do this on their own, the way merchants used to do this, they’re turning increasingly to their order management systems. The order management systems are embedding access to TaxCloud directly as a default feature that the merchant gets just by using the platform.”

Thus, FedTax gets paid by the 24 states that are part of SSUTA, but it doesn’t get paid for every transaction. “For any tax that the state would not have been able to get to otherwise, if the merchant has nexus and we manage the sales tax in that state, then we don’t get paid by the state,” said Campbell. “But if the state has no legal authority to collect a tax, or if there is no way that a merchant would have ever collected their tax without using our service, then we do get paid on those transactions.”

He gave an example for an online merchant in New York. “Let’s say you’re in New York, and you have an obligation to collect New York State sales tax,” said Campbell. “If you use TaxCloud to manage your sales tax in the state of New York, the state of New York will not pay us for managing that process for you. But we still give it to you for free because we expect that you would publish things to other states as well. If you sell something from New York into New Jersey, and you didn’t have any legal obligation to collect sales tax in New York except that you’re using TaxCloud, then the state of New Jersey would compensate us for you collecting the New Jersey sales tax and we would automatically remit it to them.”

Several other companies are Certified Server Providers for SSUTA: AccurateTax, Avalara, CCH, Exactor and TaxWare.

“It’s not an exclusive market by any means,” said Campbell. “Anybody can apply to become certified. You just have to go through the certification process.”

While FedTax does not charge merchants for its service, Campbell said his company has been able to earn enough revenue to support the business. “It has, because TaxCloud is really designed for self-service, unlike a traditional accounting package where there is some enterprise software that has consultants and professional services that wrap around with that enterprise software agreement,” he said. “There used to be lots of travel agencies everywhere. You would go there, but once you had the ability to self-serve on Expedia or Hotwire or one of those services, the cost of operation goes down significantly. That’s why we can operate TaxCloud in a manner that we don’t have to charge the merchants. But at the same time, we don’t give them tax advice. If they have a question about what they’re doing, they need to talk to their tax professional. We are not their accountants. We basically make sales tax processing extremely easy.”

Still, he is very much in favor of the Marketplace Fairness Act, which would bring more revenue to his company as well as to the states that are pressing for the legislation’s passage. “We believe that the only reason that states are in this situation that they are now is because of historic concerns about technology and an inability to keep track of all this stuff,” he said. “And as we demonstrate with thousands of merchants that use us every day, this stuff can be fully automated.”

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