The US Senate recently re-introduced the Marketplace Fairness Act. This is the latest version of the federal legislation necessary to allow states to force out-of-state vendors to collect sales tax on remote sales of property and services. This bill addresses sales by retailers with over $1 million in sales. While the intention of this bill may be to capture the sales of books, electronics, and other consumer items, the reach could be far more intrusive to businesses. http://www.enzi.senate.gov/public/index.cfm/news-releases?ContentRecord_id=27ed84d0-5ab2-4054-afdc-423a8bd36699
In a nutshell, here are some of the highlights if the bill is passed:
1. Allow states to require and enforce collection of sales tax on any remote sale delivered to state even if the seller does not have nexus with the state.
2. Requires state to have singe return for remote sellers to use
3. Fosters a market for Certified Software Providers to serve as the primary sales tax collection agency for the state under the mechanism
4. Uses the Streamlined Sales Tax Project (SSTP) as the structure for the Act.
5. Does not “deem” companies to have nexus in the state where the sale is made. Just allows states to enforce the sales tax collection absent commerce clause nexus.
From reading all the press on this issue, the intended focus seems to be collecting sales tax from individuals who purchase items from EBay, Amazon, Overstock, and the thousands of other sites that sell books, electronics, clothing, and household goods. But as the bill is written, I believe the law could reach thousands of other businesses who may not realize it applies to them. As written, this law gives a state the power to force collection of sales tax by any out-of-state business who delivers a product or service to a customer in their state. Here are a few scenarios that might catch some businesses off guard:
Mailing houses/printers: When a printer produces and mails advertising and other direct mail they normally only need to collect sales tax on the cost of the items delivered to the state where they have nexus or production facilities. Under the Marketplace Fairness Act these companies could end up collecting sales tax on the cost of mailings delivered to every state where they are directed. Given the variability in tax bases that apply to this industry, this could be a nightmare.
Software sales: the sales and delivery of most computer software can now be done efficiently through electronic download. About 1/2 of the states tax software delivered electronically and the maintenance agreements that go along with these licenses. Most of the retailers can operate nicely without traveling to other states or creating nexus. Under the Marketplace Fairness Act, their sales of downloaded software would now be sales on which they would need to collect tax when delivered to states that tax this product. Maintenance agreements would also be taxable. This may not happen immediately, but as more states adopt the SSTP provisions, this might become a reality over time.
Software as a Service: Many states tax SaaS, data processing, and information services. Many times these services can be sold without creating nexus in the destination state. Under the Marketplace Fairness Act, companies that provide these services would be subject to tax collection obligations when these services are delivered to states that tax the service. This can be a very challenging taxation exercise because the seller may not always know where the services is being consumed and the service location is often different than the “bill to” location. Again, this will depend on the states involved. Over time, there could be a great expansion of the states that tax these services as a way to capture revenue from out-of-state businesses.
As this bill moves through Congress, it may change or get stalled. As written, the Bill has a far reaching impact which can create a lot of work and expense for retailers of all sizes and types. For companies that fail to recognize their responsibility, the audit efforts by the states will likely increase in intensity.
This Bill, or one like it, may actually pass this year. If that happens, watch out!!
Ned Lenhart, CPA