Pending Legislation Set to Affect E-Commerce Transactions: What Retailers Need to Know Now
As the economy continues to shift to more sales being transacted remotely, state tax authorities have been put in a bind. Since sellers have no obligation to collect taxes on sales in states where they have no physical presence, governments are looking for ways to recover lost tax revenue on online sales. There's a real concern regarding the fiscal impact of lost tax revenue associated with these transactions. In fact, one report indicates that states collectively lost over $23 billion in sales tax revenue in 2014 alone.
There are several bills pending at the federal level that would change the current law and allow states to require remote sellers to collect sales tax. What, if anything, will happen with this these bills in this current lame duck session of Congress is unknown; however, as the tax losses grow, the impetus to act will grow as well. At some point soon, Congress will be compelled to change the rules.
To help online retailers understand how these bills could impact their operations, let’s review the proposed legislation under consideration.
“No Regulation Without Representation Act” (H.R. 5893)
This bill is similar to current regulations, which hinder governments from requiring businesses with no physical presence in a state from charging tax on sales there. This bill would officially remove many state rules that have broadened the scope of what constitutes nexus (i.e., physical location), meaning affiliate relationships would no longer count as nexus. Some businesses would therefore be required to collect taxes in fewer jurisdictions. For businesses, this proposal would remove the need to collect taxes in any location where it doesn't have people or property. This bill certainly makes tax calculations simpler for businesses, but it doesn't solve the issue of declining state revenues. Therefore, if this bill passes federally, we can expect states to look for new ways to capture lost sales tax revenues.
Marketplace Fairness Act (S.B. 698)
The Marketplace Fairness Act (MFA) allows states to impose a tax collection obligation on remote sellers if the state is a member of the Streamlined Sales Tax Agreement (SSTA) or if they enact certain simplifications to their sales tax rules, including:
- a uniform tax base between state and local jurisdictions;
- a single entity for tax administration;
- a single tax return for state and local taxes;
- a single audit for state and local taxes;
- a certification process for software providers;
- free, certified software to remote sellers that can manage the calculation and filing of the taxes; or
- publishing product taxability information as well as a rates and boundary database.
The MFA maintains the destination principle for determining the location of tax; that is, tax rules apply at the place where the item is delivered to the customer. Under this bill, retailers will likely be required to begin collecting and remitting taxes in jurisdictions in which they never have previously, increasing their tax compliance efforts. However, the states would be required to provide software to manage the compliance for these sellers, at no cost to businesses.
The Remote Transaction Parity Act (H.R. 2775)
Similar to MFA, the Remote Transaction Parity Act (RTPA) also allows states to impose tax collection obligations on online sales if the state is a member of the SSTA or if they enact simplifications. Likewise, this act adheres to the destination principal in determining where tax applies. The simplification requirements do differ slightly between the two proposals. For example, under RTPA, a state may not audit a seller whose gross annual receipts are less than $5 million in the year. However, the primary difference between the two lies in their revenue requirements. Under MFA, sellers with less than $1 million in yearly sales are not subject to the tax obligation. Under RTPA, this threshold is gradually reduced from $10 million in sales in the first year of implementation to no minimum threshold in year four. For those who are not obligated to collect these taxes now, this would add a new compliance requirement. Specifically, sellers would be required to determine tax rates, product taxability rules, and collect and remit taxes in jurisdictions where they haven’t before. However, RTPA also requires states to provide compliance software to remote vendors.
The Online Sales Tax Simplification Act (Discussion Draft)
The Online Sales Tax Simplification Act (OSSA) puts forth a wholly different approach to taxing remote sales. While the principle of allowing states to tax remote commerce remains the same, this proposal has markedly different rules for determining the tax rate, tax laws and location of the transaction than either the MFA or RTPA. This proposal purportedly attempts to make it easier for businesses to keep up with tax laws in states where they don’t have a physical presence, but still allows states to capture tax revenue currently lost to remote commerce. Most notably, this proposal would create a State Tax Clearinghouse — a central organization that manages and distributes tax revenue amongst states. States have the option of joining the Clearinghouse or may opt out, in which case different rules will apply.
Also unlike the aforementioned proposals, taxes under the OSSA are applied at the origin of the sale instead of the destination. Under the proposal, the rules applicable to a given transaction will vary based on the seller’s business footprint and the Clearinghouse membership status of the origin and destination state, resulting in a complex web of tax obligation scenarios. Already the most complex scenario, this potential legislation also doesn't provide for free software to sellers, so each seller would need to determine how best to manage the rules within their accounting system(s).
Whether one of these or some yet unforeseen legislation regarding remote sales taxes reigns supreme, a few things are certain. Sellers should expect changes to the way they charge taxes to emerge as early as 2017, and these changes will require an understanding of state and national tax laws, a complete understanding and record of all business operating locations and SKU-level sales, as well as a seamless way to track, calculate, charge and report on tax collections. Retailers would be wise to start planning for these impending changes now before they're caught off-guard.
Matthew Walsh oversees solutions for global indirect tax law compliance at Sovos Compliance.