It isn’t clear whether the House will follow the lead of the Senate and pass the Marketplace Fairness Act, the legislation requiring online vendors to collect sales taxes from their customers, but it’s still a good idea for clients who are e-commerce merchants to prepare themselves for changes in the tax laws.
“I think the best thing for businesses to do is really start the preparation and get ready for this, should it pass the House and become law,” said Carla Yrjanson, vice president of tax research and content for indirect tax at Thomson Reuters. “There are several key things that businesses can do to get ahead of the game on this. The first one is to determine the tax exposure that the particular business will have should this law go into effect. How much is at risk and how much is it going to impact the business?”
The law currently exempts online businesses with less than $1 million in annual U.S. remote sales, although businesses like eBay would like to see that threshold raised (see Senate Passes Internet Sales Tax Legislation).
“If the business is close to the threshold, then they should consider some options for complying with the regulations,” said Yrjanson in an interview Monday.
She sees a possibility for that threshold being raised to permit larger online businesses to be exempted. “I think that’s where that discussion has been,” she said. “It will be interesting to see where the threshold ends up. I think at this point, it’s safe to assume it’s $1 million. But who knows what’s going to happen? If a business is exceeding that threshold and they are utilizing an automated tax solution, they might have everything they need for this new law.”
Thomson Reuters has been updating its sales and use tax software to comply with all the state and local tax laws. “Over time there have been changes associated with the Streamlined Sales and Use Tax Project and Agreement so we’ve been updating our system as those law changes have taken place,” said Yrjanson. “Our system, just like the others for the most part, is ready to go should this be put into place.”
Businesses may need to worry about being audited by a state tax authority if they don’t comply with the sales tax laws.
“I think audits are something that businesses really should be concerned about and are concerned about today,” said Yrjanson. “There have been a lot of changes with sales and use tax laws, even without the Marketplace Fairness Act. Putting that aside, there are continual changes with sales and use tax laws, and with the change comes the possibility of an audit. Having that reporting possibility in a state brings that possibility of an audit. With the Amazon laws and normal rate changes and product taxability changes and this potential Marketplace Fairness Act, the more jurisdictions you have to collect tax in, the more you have that audit exposure.”
While the legislation requires states to provide online merchants with free sales tax software, that doesn’t apply in all instances, Yrjanson pointed out, if the merchant has a physical presence, or nexus, in the state or local jurisdiction.
“The Marketplace Fairness Act, as it’s written today, requires states to provide remote sellers with free software so they can manage that increased sales tax responsibility and there are a handful of vendors that can assist with that,” she said. “The one thing for businesses to keep in mind is that the free software is only free in the states where the e-commerce company does not have existing nexus. So if you use the software in states where the e-commerce provider is currently operating, that expense will not be paid by the states.”
Even if the software is free, it may not be such a bargain if it entails extra complexity for the online vendor. “In the states where they have a reporting responsibility, they will need to bear the expense of that software,” Yrjanson added. “The software will only be free for the businesses that do not currently have that reporting responsibility, until this act goes into place. Then when the act goes into place, they will have access to the free software where they’re considered to be the remote seller needing to charge that tax on behalf of the jurisdictions. The thing to keep in mind is that you have to weigh both [options]. The free version may be more costly to administer in the long run if you’ve got that physical presence or existing nexus today, so businesses need to look at the overall cost to manage their sales tax compliance.”
In other words, the software might be free for some online merchants, but not for others. “The software might be free in some states, but not free in other states where they have a physical presence,” Yrjanson noted. “It might be that the free software meets all of their needs, or the business may decide that purchasing a singular more robust solution that covers all tax calculations and determinations, reporting returns and filing, that might be a better option for them.”
Currently Thomson Reuters does not have an agreement with the Streamlined Sales Tax Board, Yrjanson acknowledged, but that might change. “There are a handful of vendors that do have offerings that currently assist with the administration for the businesses that are already voluntarily complying with the Streamlined Sales Tax,” she said. “I think that’s one of the things we’re looking at and considering and weighing whether that would be a good solution for us.”
Asked why Thomson Reuters hasn’t yet joined the other sales tax software vendors, she responded, “I think the Streamlined Sales Tax Project has been going on for the last decade, and we’ve been incorporating any law changes that come out of it. It really is waiting for the right time for us to get involved and ensure that the law comes to fruition.”
So far, Thomson Reuters doesn’t take an official position on the Marketplace Fairness Act. “We don’t have an official stance on whether we support it or not, but we do support keeping clients in compliance with all outstanding laws and regulations,” said Yrjanson.
The Marketplace Fairness Act would also apply to sales of digital goods such as ebooks and MP3 music files in the states that already tax them. “For digital goods, the Marketplace Fairness Act doesn’t really impact it or change it, except what will happen is with the Marketplace Fairness Act there will be more sellers, so remote sellers will then need to look at the particular laws in those states to determine whether the state is taxing electronic or digital goods, or not taxing electronic or digital goods,” Yrjanson explained. “Each state makes a determination on whether they’re choosing to tax ebooks, MP3s and those sorts of things. So the Marketplace Fairness Act means more of the sellers of digital goods will be subject to making the determination in each state whether the state will tax it or not tax it.”
Yrjanson isn’t making any predictions on whether or not the legislation will ultimately overcome the various political hurdles and be passed by the House and then signed into law.
“I don’t have a best guess on whether it will pass or not pass,” she said. “We’ve been monitoring this for the last decade. We’re ready and waiting. It’s hard to predict what will happen with the political environment.”